Low Treasury yields motivate retired investors to consider fixed-income exchange-traded funds (ETFs). The greater yields from these products can boost an individual's disposable income to a level allowing for an occasional dinner at a fine restaurant, instead of another evening at Wendy’s.
Preferred stocks have some bond-like characteristics, making them popular with those in retirement. Preferred shares pay dividends, although these dividends are not as large as those paid by corporate bonds, they are more generous than the often microscopic amounts paid as dividends from common stocks.
Preferred stocks also offer capital appreciation opportunities for investors. While most bond ETFs tilt toward capital preservation, preferred stock ETFs offer improved gains and yields.
Yield-conscious investors are mindful of the fact that an ETF’s annual expense ratio eats away at yield. Beyond that, it is a cost of owning the ETF shares, as the dollar amount lost to expenses continues over time. The average ETF expense ratio is 0.44%.
First Trust Preferred Securities and Income ETF
With a 0.86% expense ratio, the First Trust Preferred Securities and Income ETF (NYSEACRA: FPE) has an annual turnover rate of 50%. This relatively new ETF has 155 holdings. It invests at least 80% of its net assets in preferred securities and income-producing debt securities, including corporate bonds, high-yield securities and convertible securities. With over $713 million in assets, this ETF has a 30-day Securities and Exchange Commission (SEC) yield of 6.4% as of Feb. 29, 2016.
The share price chart for the First Trust Preferred Securities and Income ETF indicates a 7.08% decline in its share price and a 6.88% decline in its net asset value (NAV) from its Feb. 11, 2013, inception date through March 11, 2016.
The chart shows the most significant portion of this drop occurring during the market’s taper tantrum, with a 13.4% drop occurring from May 24, 2013, through Aug. 19, 2013. This slump compares to a 4.99% decline by the SPDR S&P 500 ETF (NYSEACRA: SPY) during the period from May 24, 2013, through June 24, 2013, just before its rebound. This suggests more significant downmarket exposure than the broader market. Its 8.16% advance between Aug. 19, 2013, and June 20, 2014, compares to an 18.91% surge by the SPY ETF during the same period, suggesting less upmarket capture than the broader market.
The First Trust Preferred Securities and Income ETF has a three-year Sharpe ratio of 0.59, indicating strong risk/return characteristics.
PowerShares Financial Preferred Portfolio ETF
The PowerShares Financial Preferred Portfolio ETF (NYSEACRA: PGF) tracks the performance of the Wells Fargo Hybrid and Preferred Securities Financial Index. With an inception date of Dec. 1, 2006, this ETF generally invests at least 90% of its total assets in preferred securities of financial institutions comprising the underlying index. With $1.59 billion in assets, this ETF has a 30-day SEC yield of 5.71% as of March 11, 2016, and a 63% expense ratio.
The share price chart for the PowerShares Financial Preferred Portfolio ETF indicates a 10.09% drop during the market’s taper tantrum from May 24, 2003, through Aug. 19, 2003, compared to a 4.99% decline by the SPDR S&P 500 ETF during the period from May 24, 2013, through June 24, 2013, just before its rebound. This suggests more significant downmarket exposure than the broader market. Its 7.94% advance between Aug. 19, 2013, and June 20, 2014, compares to an 18.91% surge by the SPY ETF during the same period, suggesting less upmarket capture than the broader market. This ETF has a three-year Sharpe ratio of 1.46, indicating impressive risk/return characteristics.
Global X SuperIncome Preferred ETF
With an inception date of July 16, 2012, the Global X SuperIncome Preferred ETF (NYSEACRA: SPFF) tracks the performance of the S&P Enhanced Yield North American Preferred Stock Index. The underlying index consists of preferred stocks meeting certain criteria relating to size, liquidity, issuer concentration and rating, maturity and other requirements, as determined by the index provider. With over $195 million in assets, this ETF has an impressive 30-day SEC yield of 7.05% as of Feb. 29, 2016.
The share price chart for the Global X SuperIncome Preferred ETF indicates a 5.27% drop during the market’s taper tantrum from May 24, 2003, through Aug. 19, 2003, compared to a 4.99% decline by the SPDR S&P 500 ETF during the period from May 24, 2013, through June 24, 2013, just before its rebound. This suggests consistent downmarket exposure with that of the broader market. Its 4.31% advance between Aug. 19, 2013, and June 20, 2014, compares to an 18.91% surge by the SPY ETF during the same period, suggesting less upmarket capture than the broader market. This ETF has a three-year Sharpe ratio of 0.47, indicating good risk/return characteristics.
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