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The Fed turned super-hawkish in its just-concluded September meeting. The central bank announced that it will start winding down its mammoth $4.5-trillion balance sheet of Treasury securities and mortgage-backed assets.
The process will start with a decrease of up to $10 billion a month from October and reach $50 billion a month by this time around in 2018. Though the Fed left the benchmark interest rate intact in the range of 1 to 1.25%, the bank hinted at another rate hike this year and three more in 2018.
The likely impact of these moves is a spike in the Treasury bond yields. Just after the meeting, yields of the benchmark 10-year U.S. Treasury jumped 4 bps to 2.28% on Sep 20, 2017 from the day before. And we believe yields may move northward in the coming days, if the Fed remains this aggressive.
Preferred Stock ETFs are known for higher yields. Not only do the preferred stocks offer considerably higher yields (often exceeding 5%), they also provide an opportunity for capital appreciation. They are hybrid securities having the characteristics of both debt and equity.
The preferred stocks pay stockholders a fixed, agreed-upon dividend at regular intervals, like bonds. Preferred stocks are thus quite stable and generally have a low correlation with other income generating segments of the market like REITs, MLPs, corporate bonds and TIPs (read: Complete Guide to Preferred Stock ETF Investing).
Inside PFFD
The fund follows the BofA Merrill Lynch Diversified Core U.S. Preferred Securities Index. The 253-security fund charges 23 bps in fees. “The ETF.com category average for ‘Fixed Income: U.S. Corporate Preferred Stock’ was 0.48% as of 8/31/2017,” as quoted on the factsheet.
Wells Fargo Co 7.50% (3.26%), HSBC Holdings PLC 8.00% (2.61%) and Bank of America Corp 7.25% (2.54%) take the top three spots in the basket. Financials is the top sector of the fund with about 73.9% exposure followed by Industrials (16.2%).
How Does it Fit in a Portfolio?
The fund could be a great option for investors in the rising rate environment. At a time like this when investors are growing increasingly concerned about rising rate risks, preferred stock ETFs could emerge as great picks.
Investors must be desperately looking for high income and low interest rate responsive products. And to accomplish this investing goal, PFFD comes across as one of the best-suited products.
Plus, as per etfdb.com, PFFD is the lowest cost Preferred Stock ETF. So far, the space had expense ratios ranging from 0.41% to 0.85%.
Competition
Though there are many funds in the high yield preferred equity ETF space, PFFD is the first in the arena focusing on such low cost. So, the newbie needs to capitalize on that criterion. Otherwise, iShares U.S. Preferred Stock ETF (PFF - Free Report) is the most popular fund, yielding about 5.24% annually and charging about 47 bps.
PowerShares Preferred Portfolio (PGX - Free Report) is another popular fund with an expense ratio of 0.50% and annual yield of 5.62%. So, we believe that PFFD has a clear road ahead and might garner sizeable assets in the forthcoming months.
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Global X Lanches The Cheapest Preferred ETF
The Fed turned super-hawkish in its just-concluded September meeting. The central bank announced that it will start winding down its mammoth $4.5-trillion balance sheet of Treasury securities and mortgage-backed assets.
The process will start with a decrease of up to $10 billion a month from October and reach $50 billion a month by this time around in 2018. Though the Fed left the benchmark interest rate intact in the range of 1 to 1.25%, the bank hinted at another rate hike this year and three more in 2018.
The likely impact of these moves is a spike in the Treasury bond yields. Just after the meeting, yields of the benchmark 10-year U.S. Treasury jumped 4 bps to 2.28% on Sep 20, 2017 from the day before. And we believe yields may move northward in the coming days, if the Fed remains this aggressive.
Against this backdrop, Global X launched a new preferred ETF, Global X U.S. Preferred ETF (PFFD - Free Report) . The fund targets U.S. preferred stocks, “providing benchmark-like exposure to the asset class” (read: 3 Thematic ETFs from Global X Hit the Market).
What Are Preferred Stock ETFs?
Preferred Stock ETFs are known for higher yields. Not only do the preferred stocks offer considerably higher yields (often exceeding 5%), they also provide an opportunity for capital appreciation. They are hybrid securities having the characteristics of both debt and equity.
The preferred stocks pay stockholders a fixed, agreed-upon dividend at regular intervals, like bonds. Preferred stocks are thus quite stable and generally have a low correlation with other income generating segments of the market like REITs, MLPs, corporate bonds and TIPs (read: Complete Guide to Preferred Stock ETF Investing).
Inside PFFD
The fund follows the BofA Merrill Lynch Diversified Core U.S. Preferred Securities Index. The 253-security fund charges 23 bps in fees. “The ETF.com category average for ‘Fixed Income: U.S. Corporate Preferred Stock’ was 0.48% as of 8/31/2017,” as quoted on the factsheet.
Wells Fargo Co 7.50% (3.26%), HSBC Holdings PLC 8.00% (2.61%) and Bank of America Corp 7.25% (2.54%) take the top three spots in the basket. Financials is the top sector of the fund with about 73.9% exposure followed by Industrials (16.2%).
How Does it Fit in a Portfolio?
The fund could be a great option for investors in the rising rate environment. At a time like this when investors are growing increasingly concerned about rising rate risks, preferred stock ETFs could emerge as great picks.
Investors must be desperately looking for high income and low interest rate responsive products. And to accomplish this investing goal, PFFD comes across as one of the best-suited products.
Plus, as per etfdb.com, PFFD is the lowest cost Preferred Stock ETF. So far, the space had expense ratios ranging from 0.41% to 0.85%.
Competition
Though there are many funds in the high yield preferred equity ETF space, PFFD is the first in the arena focusing on such low cost. So, the newbie needs to capitalize on that criterion. Otherwise, iShares U.S. Preferred Stock ETF (PFF - Free Report) is the most popular fund, yielding about 5.24% annually and charging about 47 bps.
PowerShares Preferred Portfolio (PGX - Free Report) is another popular fund with an expense ratio of 0.50% and annual yield of 5.62%. So, we believe that PFFD has a clear road ahead and might garner sizeable assets in the forthcoming months.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>