Preferred stock is a class of equity security which pays a specified dividend that must be paid before any dividends can be paid to common stock holders, and which takes precedence over common stock in the event of the company’s liquidation.
To get diversification, investors have traditionally had to turn to closed-end funds which are expensive and subject to tracking error. Preferred Stock ETFs are now available as an alternative to closed-end funds with better tracking and lower cost of management.
The iShares S&P Preferred Stock Index Fund (Amex: PFF) tracks an index of 59 preferred stocks with an expense ratio of 0.48% and with a yield of 6.45% as of February 29. The holdings are heavily weighted towards financials – almost 80% as of March 20. Inspect the holdings closely and check with your financial advisor first – names like Ford, CountryWide, Lehman, Citigroup, Merrill Lynch and National City are part of what you are getting here. More information is available at iShares website.
The PowerShares Preferred Portfolio Fund (Amex: PGX) tracks a total-return index of 83 investment-grade preferred securities that is rebalanced monthly. The expense ratio is 0.50% and the distribution yield was 7.14% as of February 29. Top holdings include BAC Capital, Citigroup Capital, Royal Bank of Scotland, Fannie Mae and Freddie Mac. Note that PGX was only launched at the end of January and has not yet attracted a large amount of capital. Learn more at PowerShares’ website.