Published:
June 9, 2008
The recently launched iShares S&P
U.S. Preferred Stock Index (AMEX: PFF, $43.45) is
one of the first ETFs specifically designed to target preferred
stocks.
According to Standard & Poor's, the market for preferred shares
has quadrupled over the past 15 years and currently stands in
excess of $200 billion. And it's easy to see why: these unique
securities carry advantages for both corporate issuers and the
investors who own them.
As a refresher, these stock/bond-hybrid securities are issued by
financial institutions and other companies to raise capital. In
general, they tend to be far less volatile than equities, while
also offering significantly higher yields than comparable
corporate bonds or alternative fixed-income instruments like
money market funds or CDs.
Many preferreds are issued with a par value of $25 per share,
and may fluctuate slightly on either side of that mark depending
on interest rates and other market conditions. Unlike
traditional corporate bonds, they don't always have a fixed
maturity date. But as long as you hold them, you can expect to
receive generous dividend distributions, usually dished out in
quarterly installments.
It's also worth noting that preferreds rank higher on the
capital structure hierarchy than common stock, so shareholders
carry a senior claim on assets in the event of liquidation.
However, defaults are exceedingly rare. As of last year, only
one member of the S&P U.S. Preferred Index (which PFF tracks)
had defaulted in the entire history of the index.
Until recently, investors interested in this high-yield,
lower-risk asset class have often had to invest in individual
preferred stocks. Unfortunately, that involves being conversant
in a variety of different features (callable vs. non-callable,
cumulative vs. non-cumulative, etc.). Furthermore, preferreds
aren't always highly liquid, so bid/ask spreads can be wide at
times.
Thanks to iShares, many of these concerns have been eliminated.
For a modest fee of just
0.48%, shareholders can conveniently track the
performance of about five dozen preferred stocks. Roughly
three-fourths of those are issued by leading financial
institutions like Bank of America (NYSE: BAC) and Met Life
(NYSE: MET), although the materials, consumer discretionary and
energy sectors are also represented.
Because preferred shareholders usually don't participate in the
financial growth (or contraction) of the underlying company,
they can typically expect relatively little price movement in
the shares. But in exchange, they enjoy a fixed stream of
generous monthly dividend payments. Currently, PFF offers a rich yield of 7.1%, or
roughly triple the S&P 500 average.
Given the turmoil in the financial
sector, many top financial firms like Citigroup (NYSE: C) have
been forced to issue billions in preferred stock to shore up
their balance sheets. Of course, as that supply has poured into
the market, share prices have been driven lower -- in turn
pushing yields higher, and improved financial results or credit
quality upgrades could lead to capital appreciation later down
the line.
Nathan Slaughter
Editor
The ETF Authority
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About Nathan Slaughter
Nathan Slaughter has developed a long and successful track
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Nathan's previous experience includes a long tenure at
AXA/Equitable Advisors, where he provided comprehensive investment advisory
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research skills at Morgan Keegan, where he performed asset allocation,
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Several years ago Nathan switched gears and decided to devote
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Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
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