PFF ETF Review: US Preferred Stock Ishares

PFF ETF: Investment objectif

The iShares Preferred and Income Securities ETF offers exposure to U.S. preferred stocks. It’s ideal for conservative investors who are pursuing income.

The main objective sought is a higher return compared to an investment in bond funds. Both bonds and preferred shares are considered fixed income asses but these two investment vehicles are quite different. In a nutshell, preferred shares are hybrid securities that have both the characteristics of stocks and bonds.

Finally, PFF is an index ETF and it’s tracking the ICE Exchange-Listed Preferred & Hybrid Securities Index. This index includes a select group of exchange-listed,
hybrid securities and convertible preferred securities. The selection criteria includes: market capitalization, industry weightings, fundamental characteristics (such as return variability and yield) and liquidity.

Updated daily – PFF ETF

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What’s a preferred stock or preferred shares

When you own a share of a company, you are part of the business. You have the right to vote and participate in shareholders’ annual meetings. Your return will depend solely on the performance of the company in the stock market and its dividends. It’s rewarding, but it’s also risky. Preferred shares are a bit different. You don’t get to vote, and you have no ownership in the business. Your preferred share entitles you priority to dividends based on a percentage agreed upon in advance. The ‘priority’ means the company needs to pay you first before paying the regular shareholders. In case of bankruptcy, you have the first claim on the assets of the company. So, in essence, a preferred share is a kind of hybrid product that shares specific characteristics of bonds (a bit of safety) and some of the regular claims (potential for appreciation).

Investors can invest directly in preferred shares as they trade like stocks. Or, they can buy preferred shares ETF to achieve diversification and reduce risk.

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Preferred shares features and risks

A preferred share grants the holder a percentage return based on its par value. There are several risks associated with preferred shares:

  • The issuer can decide not to pay dividends in a particular year because of bad financial results. Unless you hold a cumulative right, you will not receive your dividends for that year;
  • The preferred share price tends to rise if the price of the regular share rises or lose value if the opposite scenario occurs;
  • Preferred shares are sensitive to interest rates. When interest rates are low, preferred shares are in demand because their dividend is much higher than other fixed-income products. If the interest rate rise, investors will turn to safer fixed-income products such as bonds. Consequently, the price of preferred shares will decline;
  • An issuer of preferred shares can decide to recall his shares or offer the option to convert them to regular stocks anytime. This is assuming the shares that were issued are ‘callable’.

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Should buy PFF or invest directly in preferred shares

Of course, an investor can choose to invest directly in preferred shares because they are traded in the same way as regular stocks. However, this kind of investment requires some financial knowledge. This is why acquiring an ETF is most likely the best way to diversify and gain exposure to these hybrid securities.

PFF ETF Fees

Management Fee0.45%
Other Expenses0.00%
Expense Ratio 0.45%

PFF Price and historical performance

Price

Dividend yield 5.23% as per Yahoo finance (December 15th 2022)

Historical performance

PFF Sector allocation

TypeFund
Financial Institutions66.85
Industrial19.12
Utility13.29
Agency0.38
Cash and/or Derivatives0.35