SPDR Wells Fargo Preferred Stock ETF: Rock Steady

Summary

  • The SPDR Wells Fargo Preferred Stock ETF parks its funds in investment-grade preferred securities.
  • The ETF’s price has moved in a very narrow band in the last 6 years.
  • The ETF is available at a healthy forward dividend yield of 4.85%, which looks good, given the current interest rate environment.
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Kindness rock with painted you rock message and colorful polka dots

David Johnson/iStock via Getty Images

That's the thing about rocks – they don't break easily. When I held them, I wanted to be like them – strong and steady, weathered but not broken. – Ellen Dreyer

The SPDR Wells Fargo Preferred Stock ETF (NYSEARCA:PSK) is designed for income investors. The ETF invests in non-convertible preferred securities that have a par value of $25 and are rated as investment-grade by Moody’s or S&P Financial Services. Its gross expense ratio is 0.45%. The ETF tracks the performance of the ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index.

The first takeaway for all income investors is the ETF’s price action:

SPDR ICE preferred securities ETF price action

Image Source: TradingView

As per PSK’s monthly price chart, without taking the extraordinary COVID flash crash into account, the ETF has always moved in a narrow band between about $39 and $47 since 2015. In normal times, it has always gyrated back towards its 50-month EMA, which is currently at $43.30. The inference is that the ETF moves in a narrow price band and seems reasonably priced at $43.10 as of September 28, 2021. So, ex-COVID-crash data suggests that PSK is a buy on dips if it falls to its double bottom of about $39 – or an ETF to avoid if it shoots up beyond $47.

Forward Dividend Yield

PSK Forward Dividend Yield

Image Source: Seeking Alpha

PSK has been a consistent dividend payer since its inception in 2009. Based on its 2021 monthly payouts (see the image above), I believe the ETF will end up distributing a minimum of $2 as dividend this year. The payout earns it a forward dividend yield of 4.85% based on its current market price.

Given that the ETF parks its funds in investment-grade preferred securities and its price momentum has been rock-steady in the long run (ex-COVID), the forward dividend of 4.85% looks attractive when benchmarked against the current 10-year Treasury yield of 1.53%.

Portfolio and Risk Management

As of September 27, 2021, PSK’s total assets are invested in 154 preferred securities. The fund’s managers have allocated about 15% of the total assets to its top 10 holdings.

PSK portfolio

Image Source: PSK’s Website

Given that the ETF’s assets are spread over 154 preferred securities that are rated as investment grade, I would say that the ETF’s portfolio is adequately de-risked. However, investors should note that PSK’s managers flip 45% of its holdings every year – and that is quite a high annual portfolio turnover ratio (sector median: 38%).

Peer Comparison

PSK peer comparison

Image Source: Custom Comparison at Seeking Alpha

A comparison of PSK’s income-generating potential with its peers like the Invesco Preferred Portfolio ETF (PGX) and iShares Preferred and Income Securities ETF (PFF) reveals that:

  1. PSK’s TTM dividend yield of 5.19% is higher than that of its peers.
  2. However, the 4-year average dividend yield of all the peers is more or less the same.
  3. In the last 5 years, PSK’s dividend CAGR has fallen by 1.82%, which is much lower than the fall reported by its peers for the same period. However, in the last 3 years, PSK’s dividend CAGR has fallen by 8.12%, which is much higher than the fall reported by its peers.

Summing Up

PSK is a quality ETF that parks its funds in investment-grade preferred securities, its price is rock steady, the ETF is adequately de-risked, is available at a healthy forward dividend yield of 4.85%, and is a peer outperformer based on the TTM dividend yield shootout.

Economic conditions suggest that the interest rates will remain muted at least in the medium term. Market conditions and PSK’s track record suggest that the ETF will continue to deliver a rock-steady price performance and a healthy dividend yield in the long run.


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This article was written by

Michael A. Gayed, CFA profile picture
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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