Preferred Stock ETFs: Surprisingly Heavy Exposure to European Banks

Includes: PFF, PGF, PGX, PSK
by: Eric Parnell, CFA

Given all of the uncertainties weighing on the markets these days, investors may be re-evaluating their risk exposure. One area of particular concern for investors should be the situation in Europe. Even after the latest rescue effort announced last week, we’re already seeing signs of the situation deteriorating once again toward crisis. Were it not for the drama playing out in Washington with the debt ceiling debate, I suspect we would be hearing much more about these latest troubling developments from across the Atlantic. As a result, more conservative investors may be inclined to minimize their exposure to Europe in their investment portfolios.

What comes as a surprise to many investors is the heavy allocation to Europe that comes with their Preferred Stock ETFs. And nearly all of this exposure is concentrated in European banks and financials, which is the sector that would be most at risk in the event that the situation in Europe were to begin to fully unravel.

The following are the four main Preferred Stock ETFs along with their allocation to European financials.

iShares S&P U.S. Preferred Stock Index Fund (NYSEARCA:PFF) – 23.51% European Financials

PowerShares Preferred Portfolio (NYSEARCA:PGX) – 23.68% European Financials

PowerShares Financial Preferred Portfolio (NYSEARCA:PGF) – 58.44% European Financials

SPDR Wells Fargo Preferred Stock ETF (NYSEARCA:PSK) – 27.25% European Financials

Thus, roughly one-quarter of your investment in any of the broader Preferred Stock ETFs is exposed directly to the European financials. And the PGF has a majority of their holdings in European banks.

So where exactly do these European banking exposures lie within each of these products. The following is a summary breakdown for each product (all data is as of July 28, 2011).

iShares S&P U.S. Preferred Stock Index Fund (PFF)

European financial exposure by country (Total – 23.51%):

United Kingdom – 11.28%

Netherlands – 6.22%

Germany – 4.08%

Switzerland – 1.22%

Spain – 0.71%

Exposure by company:

HSBC (UK) – 5.15%

ING (Netherlands) – 4.38%

Deutsche Bank (Germany) – 4.08%

Barclays (UK) – 4.08%

Aegon (Netherlands) – 1.84%

Royal Bank of Scotland (UK) – 1.20%

Credit Suisse (Switzerland) – 0.87%

Santander (Spain) – 0.71%

Lloyds Banking Group (UK) – 0.51%

UBS (Switzerland) – 0.35%

Prudential PLC (UK) – 0.34%

PowerShares Preferred Portfolio (PGX)

European financial exposure by country (Total – 23.68%):

United Kingdom – 12.49%

Germany – 6.67%

Netherlands – 2.19%

Switzerland – 1.25%

Spain – 1.07%

Exposure by company:

HSBC (UK) – 6.86%

Deutsche Bank (Germany) – 5.02%

Barclays (UK) – 4.48%

Aegon (Netherlands) – 2.19%

Allianz (Germany) – 1.65%

Credit Suisse (Switzerland) – 1.25%

Santander (Spain) – 1.07%

Lloyds Banking Group (NASDAQ:UK) – 0.71%

Prudential PLC (UK) – 0.44%

PowerShares Financial Preferred Portfolio (PGF)

European financial exposure by country (Total – 58.44%):

United Kingdom – 30.60%

Netherlands – 16.66%

Germany – 3.31%

Switzerland – 4.38%

Spain – 3.27%

Greece – 0.21%

Exposure by company:

HSBC (UK) – 19.61%

ING (Netherlands) – 12.09%

Barclays (UK) – 4.67%

Aegon (Netherlands) – 4.57%

Royal Bank of Scotland (UK) – 4.51%

Credit Suisse (Switzerland) – 4.38%

Deutsche Bank (Germany) – 3.31%

Santander (Spain) – 3.27%

Prudential PLC (UK) – 1.81%

National Bank of Greece (Greece) – 0.21%

SPDR Wells Fargo Preferred Stock ETF (PSK)

European financial exposure by country (Total – 27.25%):

United Kingdom – 11.34%

Netherlands – 8.08%

Germany – 5.11%

Switzerland – 1.81%

Spain – 0.91%

Exposure by company:

Deutsche Bank (Germany) – 5.11%

Barclays (UK) – 5.07%

ING (Netherlands) – 5.02%

HSBC (UK) – 4.84%

Aegon (Netherlands) – 3.06%

Credit Suisse (Switzerland) – 1.60%

Santander (Spain) – 0.91%

Lloyds Banking Group (UK) – 0.89%

Prudential PLC (UK) – 0.54%

UBS (Switzerland) – 0.21%

European financial exposures are fairly similar across the three broad products. The only key differences – the PGX has exposures concentrated in fewer names and the PSK has a moderately higher weighting at roughly four percentage points higher. As for the PGF, it might as well be a European financial preferred stock ETF, as 28 of the 44 holdings in the product hail from Europe.

When reviewing the details of these allocations, one might take comfort in the fact that very few of these companies are located in the at risk countries in the region – Greece, Ireland, Portugal, Spain, Italy and Belgium. However, many of these institutions hold a considerable amount of sovereign debt issued by these countries. As a result, if a default contagion began spreading across the Euro region, these European financial institutions would be sustaining the direct hit. And given the fact that concerns persist about the capitalization of some of the financial institutions across Europe, it is likely that some may be ill prepared to sustain the damage if such a contagion event were to occur. As a result, it would be prudent to monitor events associated with any of these specific countries or companies in the coming months as event in Europe continue to unfold.

So when reevaluating risk exposures in your portfolio, it is worthwhile to keep in mind the additional exposure to European banks that comes with any Preferred Stock ETFs. It’s an exposure that could easily get overlooked otherwise.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.