Best Preferred Stock ETFs for Q4 2022

Investing News

Preferred stockholders have a higher claim to dividend payouts and the distribution of assets compared to common stockholders. In the event that a company liquidates, holders of preferred stock have a greater chance of getting paid. However, these perks do come at a cost: Many preferred stockholders do not enjoy voting rights in the company, and the shares have less potential to appreciate in price.

While companies that offer preferred stock are increasingly rare, some of the biggest U.S. firms provide this option. Many of these companies are banks, such as Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM).

Investors who want to buy preferred stocks may look to exchange-traded funds (ETFs) that specialize in this type of equity. Through preferred stock ETFs, investors receive income from multiple stocks while also enjoying the comfort of having their investment spread across several companies, thereby mitigating risk. There generally are four kinds of preferred stocks, each with distinct characteristics that investors should closely consider.

Key Takeaways

  • Preferred stocks underperformed the broader market over the past year.
  • The preferred stock ETFs with the best one-year trailing total returns are PFFA, SPFF, and PFXF.
  • The top holdings of these ETFs are preferred shares of Crestwood Equity Partners L.P., PNC Financial Services Group Inc., and Broadcom Inc., respectively.

There are 13 preferred stock ETFs that trade in the U.S., excluding inverse and leveraged funds as well as those with less than $50 million in assets under management (AUM). Preferred stocks, as measured by the S&P U.S. Preferred Stock Index, have underperformed the broader market over the past 12 months, providing a total return of -15.2% compared with the S&P 500’s total return of -11.0%, as of Sept. 1, 2022. The best-performing preferred stock ETF, based on performance over the past year, is the Virtus InfraCap U.S. Preferred Stock ETF (PFFA).

We examine the top three preferred stock ETFs below. All numbers below are as of Sept. 1, 2022, except where indicated. In order to focus on the funds’ investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.

  • Performance Over One-Year: -7.8%
  • Expense Ratio: 1.21%
  • Annual Dividend Yield: 7.58%
  • Three-Month Average Daily Volume: 152,248
  • Assets Under Management: $544.6 million
  • Inception Date: May 15, 2018
  • Issuer: Virtus Investment Partners

PFFA seeks to provide current income and capital appreciation by investing in preferred securities of U.S. companies with market capitalizations of more than $100 million. The fund is actively managed and uses a range of quantitative, qualitative, and relative valuation factors. PFFA focuses primarily on preferred stocks issued by companies with high growth potential or strong value characteristics.

The fund’s top three holdings as of Sept. 2, 2022 are preferred shares issued by Crestwood Equity Partners L.P. (CEQP), an energy infrastructure and distribution company; Babcock & Wilcox Enterprises Inc. (BW), a renewable and thermal energies technology company; and RLJ Lodging Trust (RLJ), a real estate investment trust (REIT) focused on hotels.

  • Performance Over One-Year: -9.4%
  • Expense Ratio: 0.58%
  • Annual Dividend Yield: 5.69%
  • Three-Month Average Daily Volume: 80,469
  • Assets Under Management: $204.6 million
  • Inception Date: July 16, 2012
  • Issuer: Mirae Asset Global Investments Co. Ltd.

SPFF seeks to track the S&P Enhanced Yield North American Preferred Stock Index, comprised of 50 of the highest-yielding preferred stocks based in North America. As of July 31, 2022, financials stocks represented more than 68% of the fund’s portfolio, with energy, utilities and other sectors comprising roughly the remaining third.

The top holdings of SPFF include preferred shares of PNC Financial Services Group Inc. (PNC), a bank holding and financial services company; Becton, Dickinson and Co. (BDX), a medical devices, instruments, and other products; and Duke Energy Corp. (DUK), an electric power and natural gas holding company.

  • Performance Over One-Year: -10.7%
  • Expense Ratio: 0.40%
  • Annual Dividend Yield: 4.82%
  • Three-Month Average Daily Volume: 278,692
  • Assets Under Management: $1.0 billion
  • Inception Date: July 16, 2012
  • Issuer: VanEck

PFXF tracks the ICE Exchange-Listed Fixed & Adjustable Rate Non-Financial Preferred Securities Index, which is designed to gauge the performance of hybrid debt, preferred stock, and convertible preferred stock issued by nonfinancial corporations listed on U.S. exchanges. The ETF seeks to provide investors with high-income potential by investing in preferred stock, which has historically offered higher yields than common stock and senior debt. Its largest allocations are in these sectors: electric utilities and independent power producers; residential and commercial REITs; and telecommunications services. The fund follows a blended strategy, investing in a mix of growth and value preferred shares of companies with a range of market caps.

PFXF’s top three holdings are the preferred shares of Broadcom Inc. (AVGO), a provider of semiconductor and infrastructure software products; NextEra Energy Inc. (NEE), an electric power and energy infrastructure company; and Danaher Corp. (DHR), a medical, industrial, and commercial products and services company.

The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. Though we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.

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