Market Vectors, the ETF issuer from investment firm Van Eck, launched its first product in the increasingly popular preferred stock segment with a unique twist; the product excludes financial companies.
The Van Eck Market Vectors Preferred Securities ex-Financials ETF (PFXF) is the first product in the segment that excludes financial companies such as banks, broker-dealers, investment advisers and futures commission merchants from its portfolio, giving the fund completely new risk-reward characteristics.
The company believes removal of financials would result in less volatile products as research showed financials have been the most volatile sector in the past five years while standard deviation (a measure of price fluctuation) for financials has been nearly double than non-financials even though dividend yields have been less than 20 basis points more per year.
PFXF follows the Wells Fargo Hybrid and Preferred Securities ex-Financials Index which contains convertible securities, perpetual subordinated debts and depository preferred securities. From an industry perspective, REITs, electric, auto makers, telecommunications, and insurance companies occupy the top five spots. With the inclusion of insurance firms and REITs, PFXF has clearly excluded only banks and broad financial service providers.
The index consists of about 68 securities with credit ratings varying between AA and CCC and generates an average current yield of 6.8 percent. Investors should, however, note that 35.25 percent of the index components have no credit rating at all.
The preferred securities ETF market has about $13 billion in total AUM, while PFXF has notched up around $96 million in the four months since its launch in July.
This product can be a compliment for preferred stock investors who are searching for robust yields but wish to avoid products that are heavily concentrated in financials.
Risks in preferred security investments include deferred or suspended distributions and downward price pressure when interest rates increase. Also certain preferred securities may be subordinate to senior loans or traditional fixed income securities.
PFXF has a gross expense ratio of 0.52 percent and a net expense ratio of 0.40 percent, making it one of the cheapest preferred stock ETF funds.
As always, if you invest in anything, be sure to use my recommended trailing sell stop discipline. Just because a new ETF avoids financials in its composition does not mean all is smooth sailing, as markets during these uncertain times can unrail any asset class in a hurry.
Disclosure: No holdings