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 firms in the U.S. do 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.
- Preferred stocks dramatically underperformed the broader market over the past year.
- The preferred stock ETFs with the best one-year trailing total return are PFFA, PFFR, and PFXF.
- The top holdings of these ETFs are preferred shares of American Finance Trust Inc., Monmouth Real Estate Investment Corp., and Broadcom Inc., respectively.
There are 12 preferred stock ETFs that trade in the U.S., excluding inverse and leveraged funds as well as those with under $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 7.2% compared to the S&P 500\’s total return of 34.0%, as of Aug. 10, 2021. The best-performing preferred stock ETF for Q4 2021, based on performance over the past year, is the Virtus InfraCap U.S. Preferred Stock ETF (PFFA). We examine the top three most preferred stock ETFs below. All numbers are as of Aug. 10, 2021.
Virtus InfraCap U.S. Preferred Stock ETF (PFFA)
- Performance Over One-Year: 40.7%
- Expense Ratio: 1.47%
- Annual Dividend Yield: 7.41%
- Three-Month Average Daily Volume: 196,526
- Assets Under Management: $482.0 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. It focuses primarily on preferred stocks issued by micro-cap companies with either high growth potential or strong value characteristics.
PFFA\’s top three holdings are preferred shares of American Finance Trust Inc. (AFIN), a real estate investment trust (REIT) focused on service-oriented, traditional retail, and distribution commercial real estate properties; RLJ Lodging Trust (RLJ), a REIT with a portfolio of hotels; and DCP Midstream LP (DCP), a midstream natural gas company.
InfraCap REIT Preferred ETF (PFFR)
- Performance Over One-Year: 19.9%
- Expense Ratio: 0.45%
- Annual Dividend Yield: 5.85%
- Three-Month Average Daily Volume: 27,140
- Assets Under Management: $84.9 million
- Inception Date: Feb. 7, 2017
- Issuer: Virtus Investment Partners
PFFR tracks the Indxx REIT Preferred Stock Index, a market-cap weighted index designed to provide diversified exposure to high-yield, liquid preferred securities issued by REITs that are listed in the U.S. The ETF focuses on preferred securities issued by REITs because they tend to offer attractive yields and are typically exposed to less leverage and volatility, resulting in more predictable revenue streams than the preferred securities of banks and insurance companies.
PFFR follows a blended strategy, investing in a mix of both growth and value preferred securities of primarily micro-cap REITs. The fund\’s top three holdings are preferred shares issued by Monmouth Real Estate Investment Corp. (MNR), a REIT that invests in single-tenant, industrial buildings leased to investment-grade tenants; Annaly Capital Management Inc. (NLY), a mortgage REIT focused on investing in mortgage-backed securities mortgage-backed securities (MBS) and commercial mortgage loans; and AGNC Investment Corp. (AGNC), a REIT that primarily invests in agency residential MBS on a leveraged basis.
VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
- Performance Over One-Year: 16.6%
- Expense Ratio: 0.40%
- Annual Dividend Yield: 4.50%
- Three-Month Average Daily Volume: 151,806
- 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. It offers broad diversification by investing in a range of nonfinancial companies, with its largest allocations being in the following sectors: electric utilities and independent power producers; residential and commercial REITs; and healthcare equipment and supplies.
PFXF follows a blended strategy, investing in a mix of growth and value preferred shares of companies with a range of market caps. Its top three holdings are the preferred shares of Broadcom Inc. (AVGO), a provider of semiconductor and infrastructure software products; ArcelorMittal S.A. (MT), a Luxembourg-based steel manufacturing company; and Danaher Corp. (DHR), a designer and manufacturer of professional, medical, industrial, and commercial products and services.
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