New York City-based ETF issuer Global X, famous for its focus on income and sector funds, continues to push ahead with high yield products with its latest product, the SuperIncome Preferred ETF (SPFF).
The fund seeks to replicate the S&P Enhanced North American Preferred Stock Index that includes about 50 preferred stocks and is the firm’s first venture into the highly competitive world of preferred stock ETFs.
SPFF is similar to the recently launched Van Eck ex-Financials Preferred Stock ETF (PFXF) with the difference that it’s the first fund to target specifically the highest yielding securities. Also the expense ratio is a little higher, at 58 basis points a year its closer to the upper limit even though the underlying index has returned about 7.5 percent annually historically.
The preferred stocks are selected based on certain liquidity, issuer rating, maturity and capitalization parameters while the underlying index uses a modified capitalization-weighted system to ensure no one security is overweight on the index and the overall risk-return profile of the ETF.
SPFF is highly concentrated in financials and 89 percent of total asset holding consists of financial assets. The other significant holdings are utilities, telecom and materials. Though exposure in financial stocks is high, the underlying index has outperformed similar preferred stock indexes.
The passively managed ETF is relatively well diversified with the top ten holdings accounting for nearly one-third of total assets under management. However, the top three holdings – Credit Suisse, AIG and Wells Fargo, make up roughly about 12 percent of assets.
The ETF uses a “Representative Sampling” strategy method that involves investing in a sample set of securities that collectively show similar investment-profile characteristics of the underlying index in terms of performance and key-risk attributes.
Global X expects the correlation between the fund and the underlying index to exceed 95 percent, before fees and expenses. However, investors should note that representative sampling strategy has lower correlation to the underlying index compared to replication strategy. Also high-yield securities carry greater default risk and are often speculative in nature.
Additionally, odds are great that these types of ETFs will get hit hard when next bear market strikes. For this reason, you should only enter this arena if you are prepared to use a trailing sell stop to manage downside risk, which in the current market environment, can surface quickly the moment more adverse negative financial news flows out of Europe and onto the front page.
Disclosure: No holdings