PSK: Better Preferred ETFs Exist

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Dividend Derek
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Summary

  • The SPDR ICE Preferred Securities ETF holds over 160 preferred share issues.
  • The fund is the 6th largest in the preferred share ETF space with $1.47B in AUM.
  • In a busy ETF space, the fund falls behind other competitors.
  • The monthly fund yields about 5.08% and costs 45 basis points.
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Book with page about preferred stock. Trading concept.
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ETF Profile

The SPDR ICE Preferred Securities ETF (NYSEARCA:PSK) launched in September of 2009 during the Great Recession. It wasn't the best time to launch a fund, but it is one of the oldest ETFs in the preferred share space. It's the sixth-largest preferred share ETF with about $1.47B in AUM. For comparison's sake, the iShares Preferred and Income Securities ETF (PFF) has $19.5B in AUM.

PSK holds about 160 preferred share issues, lower than many in its peer group. The current yield is about 5.08% and costs 45 basis points.

Methodology

The fund tracks the Wells Fargo Hybrid and Preferred Securities Aggregate Index. The index will hold preferred stock and, in some cases, other functionally equivalent holdings such as depositary shares, perpetual subordinated debt, and other securities deemed "equivalent."

Securities must have a par amount of $25 and have a minimum outstanding value of $250M. The dividends themselves can be fixed or floating and denominated in USD. Every security must be investment-grade rated by Moody's or S&P. There are exceptions to that rule, but generally speaking, it will be investment-grade. That means Baa3 or above for Moody's and BBB- or above by S&P.

The index uses market-cap weighting and is rebalanced on the last trading day of each month (or event-driven such as repurchases or defaults of securities). A few additional weighting rules such that any specific constituent or issuer can't have more than 5% of the index.

Like most preferred share ETFs, the index will hold lots of financial institution issues. Banks and other financial institutions issue preferred shares because they count as assets in their Tier 1 capital requirements. As a result, preferred shares can help avoid common share dilution, and investors are attracted to higher yields.

(Source)

Only the AT&T (T) and Southern Company (SO) issuances are not financial institutions from the top ten. The story remains the same as we look at the sector allocations. Financials comprise 69% of the fund.

(Source)

Dividend History

The dividends paid by the ETF have been slowly trending downward as interest rates have declined over the years. This is not unique to PSK but has been across the whole space. At the start of 2018, they moved to a monthly payout from the quarterly schedule previously. I created a table to show the amounts by year and the slow annual declines. As you can see, the amount received in 2020 was lower than what an investor received in 2017.

Year Totals Growth
2020 2.2565 -4.35%
2019 2.3592 -7.88%
2018 2.5611 11.68%
2017 2.2933 -7.64%
2016 2.4830 -

Competitors

In the broad, preferred share ETF space, some of PGX's closest competitors are:

  • iShares Preferred and Income Securities ETF (PFF)
  • VanEck Vectors Preferred Securities ex-Financials ETF (PFXF)
  • Global X U.S. Preferred ETF (PFFD)
  • Invesco Preferred ETF (PGX).

I've written analyzes on PFF, PFFD, PFXF, and PGX if you wish to read more about those.

Besides passive indexes, there are other types of competitors available. PFFA and PFFR take a sector-focused, active strategy and utilize leverage. These funds offer juicier yields while still being underneath the ETF wrapper. SPFF is designed to seek out the highest-yielding preferred instruments (those that carry a different set of risks).

Many CEF options exist, such as PDT, HPS, JPS, FPF, PTA, FFC, but those will be out of scope here. Those funds commonly utilize leverage and can trade at discounts to boost distribution yields. Finally, the enterprising investor could hold a basket of individual preferred shares.

I included links to the index methodologies where I could find them.

Name Ticker Yield Holdings Expense Ratio Pays Tracks
iShares Preferred and Income Securities ETF (PFF) 4.53% 503 0.46% Monthly ICE Exchange-Listed Preferred & Hybrid Securities Index
Invesco Preferred ETF (PGX) 4.89% 293 0.52% Monthly ICE BofAML Core Plus Fixed Rate Preferred Securities Index
Global X U.S. Preferred ETF (PFFD) 5.03% 285 0.23% Monthly ICE BofAML Diversified Core U.S. Preferred Securities Index.
VanEck Vectors Preferred Securities ex Financials ETF (PFXF) 4.62% 134 0.41% Monthly Wells Fargo® Hybrid and Preferred Securities ex Financials Index
SDPR Wells Fargo Preferred Stock ETF (PSK) 5.08% 157 0.45% Monthly Wells Fargo Hybrid and Preferred Securities Aggregate Index

Each ETF pays monthly, and all are well diversified. PFFD has the lowest expense ratio at just 23 basis points. PSK is in the middle of the pack at a 45 basis point cost, just under PFF and PGX.

Analyzing the past three years, yields have all trended downwards. This has been from a combination of record-low interest rates, pandemic recovery, and the lack of many reliable income sources in this environment. The enterprising investor may have been able to secure outsized yields during the March 2020 meltdown.

I've mentioned it in other pieces, but the spike witnessed last year highlights that you can't hide during market panics. Preferred shares will not offer safety. Prices for all these funds plummeted 25-30% during March 2020. Since it happened before, it could happen again, be aware of that.

I have two more charts for your consideration. The first one is a three-year view, including PFFD, as Global X launched the fund in late 2017. The purple value is PSK, and unfortunately, it was the laggard among the five funds considered. I've been a big fan of PFFD for its great performance and low-cost basis. However, expenses aren't everything, and the VanEck fund PFXF was the top performer over the past three years. The data would suggest there seems to be alpha by excluding financials.

Now for this second chart, I removed both PFFD and PFXF and have the three oldest funds to compare returns. Remember, PSK is the youngest alongside PFF and PGX, dating back to September of 2009.

Between these three, PGX was the best performer with a 136% total return versus 122% for PFF and finally 119% for PSK. Unfortunately, I've found PSK to be the laggard among all these competitors, regardless of the timeframe.

Risks

I alluded to it earlier, but were you around in 2008 or 2020? Preferred shares will share price movements more similar to common stocks than to bonds. These ETFs can and will experience painful drawdowns alongside the rest of the stock market. Even if the asset class is "safer" than common equities, they'll follow similar drawdowns. Investors won't be immune from volatility, but perhaps with a clear head, they could profit greatly by diving in when it does happen.

Conclusion

Preferred shares offer a great income opportunity for investors, regardless of the time horizon. Be prepared to handle volatility as these funds can experience large drawdowns during market crises.

While PSK offers diverse exposure to the preferred share market, it lagged behind all its competitors across several time horizons and several metrics. It ranked middle of the pack with an expense ratio lower than older competitors PFF and PGX, but newer funds PFFD and PFXF, were cheaper to own. In fact, the 23 basis point expense ratio of PFFD is half of PSK's 45 basis points.

The funds are all well-diversified, though PSK holds the second-fewest holdings, only holding more than PFXF. PFXF, remember, is unique in that it excludes financials. PSK fails to differentiate itself from the other funds that are heavily levered to financials.

Finally, PSK lagged all competitors in total returns across several time periods. Among its oldest peers PFF and PGX, it finished last. When considering newer funds PFFD and PFXF, PSK again ranked at the bottom of the pack.

In the end, PFFD and PFXF both look appealing. They had the strongest return profiles, and PFFD is the low-cost leader. As a result, I would recommend investors look first at the VanEck fund PFXF or the Global X fund PFFD.

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This article was written by

Dividend Derek profile picture
22.29K Followers
Derek is an individual investor seeking to navigate the investment world to provide a wealthy and stable retirement for his family. He aims to help fellow investors, notably younger investors, establish a plan to produce a growing income stream. Derek holds a Bachelor's degree in Computer Science with a minor in Economics from the University of Delaware and lives with his wife and two children.Derek created and operates customstockalerts.com. It's a suite of utilities for investors to stay on top of all their stocks. Pick a company you're interested in, pick an alert type (price, dividend yield, PE, etc.) and a value. You'll get a text or email (your choice) when your value hits. Also, get alerts for upcoming dividends, including increases (works for stocks and ETFs). Use it as a chance to buy and collect the dividend!Come check me out at customstockalerts.com!

Disclosure: I am/we are long PFFD, PFXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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