Though yields on the benchmark 10-year U.S. Treasury note recently popped on a host of upbeat U.S. economic readings and the Fed rate hike speculation, yields are still at subdued levels.
As of October 6, 2016, yield on the U.S. Treasury note was 1.75%. Also, though the major indices recovered lately, these are not out of the woods. Global growth issues and any weakness in the upcoming corporate earnings may still derail market momentum and keep long-term interest rates low.
Investors should note that even if rates rise in the future on the Fed policy tightening, many may still be looking for benchmark-beating yields. Though there are quite a few options, the current combination of relatively lower rates and higher equity risks makes investing in preferred stocks one of the most favored practices (read: Why Income Investors Should Not Ignore Preferred Stock ETFs).
Preferred Stock ETFs in Focus
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 stockspay 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.
Though investors can buy individual companies’ preferred stocks, buying preferred stock ETFs can be a very convenient way of investing in a basket of diversified companies at a low cost. Below we have highlighted five ETFs, which not only offer substantial yields but also provide a great opportunity for capital appreciation.
PowerShares Preferred ETF (PGX - ETF report) ) – 5.68% Yield
The $4.76-billion fund holds a portfolio of 252 preferred stocks in its basket, tracking the BofA Merrill Lynch Core Fixed Rate Preferred Securities Index. It charges 50 bps in fees. Financials (74.8%) dominates this fund followed by utilities (8.4%).
PowerShares Variable Rate Preferred Portfolio ETF (VRP - ETF report) ) – 4.89% Yield
The fund looks to track the performance of preferred stock, as well as certain types of hybrid securities that are functionally similar to preferred stock, that are issued by US-based or foreign issuers and that pay a floating or variable rate dividend or coupon. The $865.3-million ETF holds about 93 stocks and charges 50 bps in fees. The fund could be a great option for investors in the rising rate environment (read: ETF Strategies for a Rising Rate Environment).
SuperIncome Preferred ETF (SPFF - ETF report) – 6.23% Yield
As the name suggests, the $233.6-million fund calls for outstanding dividend yields. Wells Fargo Co (5.55%), Kinder Morgan (5.37%) and GMAC Cap (Ally) PFD 8.125% (4.67%) take the top three spots in the basket. The fund charges 58 bps in fees (see all preferred stock ETFs here).
PowerShares Financial Preferred Portfolio (PGF - ETF report) – 5.60% Yield
The fund tracks the Wells Fargo Hybrid and Preferred Securities Financial Index, managing a fund size of $1.82 billion. Holding 89 preferred stocks in its basket, the fund provides an exposure to U.S. listed securities issued by financial institutions. The fund charges 63 bps in fees. The fund has a notable 30-day Sec yield of 5.39% and an effective duration of 4.77 years indicating moderate interest rate risks.
SPDR Wells Fargo Preferred Stock ETF (PSK - ETF report) – 5.47% Yield
The 157-securities portfolio invests 63% of the basket in the financial sector. Real Estate, utilities and telecom take the next three spots. The fund charges 45 bps in fees.
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