Preferred ETFs, Another Choice

by: Scott Arterburn


Preferred ETFs are another investment to choose from.

Preferred stocks mirror each other.

Preferred ETFs are safer than their holdings.

Preferred stock ETFs are one more way for an investor to diversify his portfolio. The funds only hold preferred stock of specific companies, which is ideal for investors who are looking for higher yields, diversification, and a little less risk than common stock.

Preferred stocks have some advantages over common stocks:

  1. Preferred stocks have a higher priority to a company's assets if that company ever defaulted. Common stock holders are usually wiped out in default.
  2. Dividends can be higher and more consistent than dividends on common stock. Preferred stock has a higher priority and gets paid first on any dividends a company might declare.

They also have some disadvantages:

  1. Preferred stock doesn't have the same profit potential as common stock. Preferred stock prices don't tend to move as much as common stock prices do. Common stock holders could earn more if the price appreciates. They could also earn less if the price depreciates.
  2. Preferred stock holders don't usually have voting rights, unlike common stock holders.

Just like with any other investment an investor needs to do his research when picking an ETF to buy. An investor might run across a website called This is a website that is devoted to ETFs. If the investor searched by preferred stocks they will see this list of ETFs to choose from. One may see this list and think there is a variety to choose from. Looking into each fund you will find that there are really only three types. That is because out of the top 10, eight of them are concentrated in U.S. bank preferred stocks. Of the other ones, one is invested in Canadian preferred stocks and the other one in U.S. companies that aren't financial related. The top five ETFs in terms of amount of assets under management are:

  • iShares S&P U.S. Preferred Stock ETF (NYSEARCA:PFF)
  • PowerShares Preferred Portfolio ETF (NYSE:PGX)
  • PowerShares Financial Preferred Portfolio ETF (NYSE:PGF)
  • SPDR Wells Fargo Preferred Stock ETF (NYSEARCA:PSK)
  • Market Vectors Preferred Securities ex Financials ETF (NYSEARCA:PFXF)

One unusual thing I see right away is that PowerShares has 2 of the top 5 funds. They are both concentrated in financials. The only difference I see between the two PowerShares funds is that PGX has a larger amount of holdings (209) compared to PFG (84).

If an investor was adamant about adding one of these to his portfolio, which one should they choose? These five ETFs all move together which can be demonstrated by their graphs on Yahoo Finance.

We will have to look at other metrics to differentiate between these ETFs. Another way to compare them would be to look at the yield. All these ETFs have a yield between 5.5% and 6.56%. If yield was your priority, PFF would be the best choice. The next thing to look at would be default risk. Since the ETFs are investing in the same holdings they are going to have the same default risk. 70% of the funds' investments are in BBB and BB bonds. Here is the credit rating of PFF. I would have to give the advantage to PFF on this as well because it has the most holdings and largest dollar amount of assets. PFF would be hurt less if some of its holdings defaulted. PFF also has a longer track record of performance by at least five years. Below is a table of the last year results. All funds seem to have the same return except for PSK which has lagged.

Ticker Yield Dividend # of holdings Price aT beg. and end Amount of assets 1 Yr. price change 1 Yr total return
PFF 6.56% monthly 324 $38.53-$39.53 $10,404,965,000 2.60% 9.16%
PGX 6.12% monthly 206 $14.02-$14.38 $2,266,059,000 2.57% 8.69%
PGF 6.04% monthly 84 $17.52-$17.95 $1,407,794,000 2.45% 8.49%
PSK 5.56% quarterly 138 $42.65-$43.22 $262,560,000 1.33% 6.89%
PFXF 6.03% monthly 90 $19.60-$20.23 $171,312,000 3.21% 9.24%

How do these ETFs do against their common stock holdings? All the financial ETFs have the first five preferred stocks in their top 10 holdings. These include HSBC Holdings (NYSE HSBC), Wells Fargo (NYSE WFC), Citigroup (NYSE C), Barclays (NYSE BCS), and JPMorgan Chase (NYSE JPM). ArcelorMittal (NYSE MT) is the largest holding in PFXF.


Beginning and ending price

1 yr return

Dividend yield

Total return































The stocks' returns look very different. Only two beat the preferred ETFs. All the preferred ETFs have a larger yield than the stocks. The prices don't fluctuate as much either. The returns for the stocks were much more volatile. This is where an investor has to decide on how much risk to take. Three of the stocks did poorly. If you chose WFC or MT you would have been very happy. However, you wouldn't have been disappointed if you chose any of the preferred funds.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.