In a complex market environment, many retail investors find that opting for exchange-traded funds (ETFs) is a more effective strategy for investing in preferred stocks rather than purchasing individual securities. The intricacies of preferred shares can be daunting, featuring various characteristics such as call provisions that allow issuers to redeem them early when interest rates decline and more complex dividend structures that change based on predetermined formulas. Additionally, issues around credit quality and liquidity make trading preferred stocks less straightforward than dealing with common equities.
ETFs help mitigate these challenges by offering benefits such as immediate diversification over a broad range of preferred securities, daily portfolio transparency, and professional management—all while simplifying the income distribution process for investors. The market has responded with a wide array of preferred stock ETFs, three of which stand out due to their unique features.
The iShares Preferred and Income Securities ETF (PFF) is the largest in this category, managing about $13.17 billion in assets. PFF tracks the ICE Exchange-Listed Preferred & Hybrid Securities Index, providing exposure to approximately 460 preferred securities. After accounting for its 0.45% expense ratio, the fund boasts a 30-day SEC yield of 6.32%. It is known for its lower volatility compared to the broader stock market; over a three-year period, its beta stands at around 0.50, half that of the S&P 500 index. A notable feature of PFF is its significant allocation—over 56%—to financial institutions, which are the primary issuers of preferred securities, allowing these entities to raise regulatory capital without additional common share issuance or traditional debt increase.
In contrast, the VanEck Preferred Securities ex Financials ETF (PFXF) offers an alternative for those wishing to evade excessive financial sector concentration. With around $2.43 billion in assets and a slightly lower 0.40% expense ratio, PFXF eliminates financial issuers from its portfolio. Instead, it diversifies across various sectors, primarily allocating roughly 25% of its assets to electric utilities, followed by investments in technology, real estate, and defense companies. Its credit quality mirrors that of the overall preferred market, with over one-quarter of its holdings rated BBB and more than half remaining non-rated.
For those prioritizing monthly income generation, the Virtus InfraCap U.S. Preferred Stock ETF (PFFA) emerges as a strong candidate, currently offering an impressive 8.67% 30-day SEC yield. Unlike its index-based counterparts, PFFA employs active management, enabling its managers to sidestep potential pitfalls like negative yield to call, which can occur when a security trades significantly above its call price. The fund’s active strategy is complemented by an allowance for 20% to 30% portfolio leverage, increasing the potential for income during favorable market conditions, albeit with heightened risk during downturns. PFFA’s total expense ratio, including borrowing costs, stands at 2.11%, highlighting the trade-off between potential returns and expenses.
Despite its increased costs, PFFA has shown resilience, achieving an annualized total return of 11.77% over the past three years, outpacing the S&P U.S. Preferred Stock Index’s 6.61%. Each ETF presents its own distinct advantages, allowing investors to choose according to their risk tolerance, income needs, and market outlook.
