Preferred stocks tend not to get a lot of attention, but I think the asset class does have a place in one’s portfolio for yield without the same degree of volatility as common stock. Fortunately, there are exchange-traded funds, or ETFs, out there worth looking at for exposure, like the Invesco Financial Preferred ETF (NYSEARCA:PGF). PGF is a fund that primarily invests in fixed-rate preferred securities issued by financial entities in the U.S. domestic market. The fund, which began its operations on December 1, 2006, tracks the ICE Exchange-Listed Fixed Rate Financial Preferred Securities Index.
It is worth noting that preferred securities are a unique class of investment that share traits with both stocks and bonds, offering investors a higher claim on dividends and assets than common stockholders. The PGF ETF focuses on these securities within the financial sector, a sector that has its distinct set of rewards and risks. The fund’s strategy mandates that it holds at least 90% of its total assets in such securities. A key aspect of this fund is that it is rebalanced monthly, maintaining its alignment with the index it follows.
Looking Into The ETF Holdings
PGF currently holds 95 different securities. It has an effective duration of 8.93 years, which provides a measure of the fund’s sensitivity to changes in interest rates. These securities are primarily issued by major financial institutions, a fact that carries implications in terms of the fund’s risk and reward profile.
The fund’s five largest holdings, occupying a substantial portion of the fund’s asset value, are entities such as JPMorgan Chase & Co., Allstate, Wells Fargo & Co., and Capital One Financial Corp. No position makes up more than 2.49% currently, though the issuer weightings are heavier since there are multiple holdings per institution.
Sector Composition: A Closer Look
One of the unique features of the PGF ETF is its sector-specific focus. The fund is heavily tilted towards the Financial sector, making it really a sector fund. It’s true that the preferreds space tends to be dominated by Financials (and Industrials) in general, but this is essentially all on the Financials side.
This sector-specific concentration implies that the fund’s performance is largely influenced by the trends and developments within the Financial sector. It also means that the fund is more susceptible to sector-specific risks, such as regulatory changes, economic cycles, and financial crises that can significantly impact financial institutions.
When we look at the quality allocations, we see that this is primarily a BBB fund, with the rest of the positions not lower on the credit quality side.
PGF Versus Its Peers: A Comparative Analysis
When evaluating an investment option like PGF, it’s good to consider its performance relative to other similar funds. Some of its notable peers include the iShares Preferred and Income Securities ETF (PFF), and the Invesco Preferred ETF (PGX).
PGF has slightly outperformed PGX, but vastly underperformed PFF. Much of this can be attributed to the fact that PFF has considerably less exposure to Financials (73%) and 16% in Industrials, the latter of which has been the real winner in this cycle.
Pros And Cons of Investing In The PGF ETF
Like any investment, the PGF ETF comes with its unique set of merits and demerits that must be weighed before making an investment decision. On the upside, the fund offers a high distribution yield, which is an attractive feature for income-focused investors. The fund’s focus on preferred shares of major financial institutions could also be a plus, given their significance in the economy and their potential for steady dividend payments.
However, the fund’s concentrated exposure to the Financial sector is a double-edged sword. While it might offer sector-specific gains during favorable market conditions, it also exposes investors to heightened risks during downturns or crises in the financial sector. Additionally, the fund is susceptible to interest rate risks, given its focus on fixed-rate securities.
To Invest Or Not to Invest: The Final Verdict
The Invesco Financial Preferred ETF’s unique focus on preferred shares of financial companies is interesting. It provides an opportunity to derive income from some of the largest and most influential financial institutions in the U.S. However, the fund’s sector-specific concentration and susceptibility to interest rate changes could add layers of volatility and risk to your portfolio.
Overall, I’d say Invesco Financial Preferred ETF is a good fund for when Financials show some renewed overall momentum and as rates fall, given the fund’s effective duration. Worth keeping on a watch list.