PFFD - PFFD: Preferreds From Financials Make Sense Here

2023-12-19 17:04:36 ET

Summary

• Global X U.S. Preferred ETF is a good investment option due to its unique characteristics, market performance, and potential for high yield.
• The PFFD ETF's portfolio consists of preferred shares from various sectors, with financial companies dominating the holdings.
• PFFD offers competitive features like a low expense ratio and high yield potential, making it an attractive investment option.

I've talked about preferreds as being an interesting play now and maintain that they are a good place to consider allocating to given the Fed's pivot. The Global X U.S. Preferred ETF ( PFFD ) stands out due to its unique characteristics, market performance, and potential for high yield.

PFFD aims to replicate the price and yield performance of the ICE BofA Diversified Core U.S. Preferred Securities Index. This index is designed to track the broad performance of the U.S. preferred securities market. PFFD offers exposure to a wide range of preferred stocks in the U.S., a sector historically known for high yield potential.

ETF Holdings

PFFD's portfolio comprises preferred shares from a diverse range of sectors. However, financial companies dominate the ETF's holdings, accounting for approximately 70% of its net investments. Some of the top individual positions in PFFD include:

• JPMorgan Chase & Co. (JPM): A premier global financial services provider with a robust asset base of $2.7 trillion.
• Bank of America Corporation (BAC): A top-tier worldwide financial entity, dedicated to serving individual customers, small to mid-sized businesses, and large corporations, offering an extensive range of banking, investment, asset management, as well as financial and risk management solutions.
• Wells Fargo & Company (WFC): A widespread, community-oriented financial services institution boasting $1.9 trillion in assets.
• Citigroup Inc. (C): An expansive financial services conglomerate delivering a broad spectrum of financial offerings, including consumer banking, credit services, corporate and investment banking, securities brokerage, as well as trading and securities services, coupled with wealth management.
• Morgan Stanley (MS): A globally recognized financial services leader specializing in investment banking, securities, investment management, and wealth management services.

Sector Composition

The sector composition of PFFD is heavily weighted towards the financial sector, which represents more than 70% of the fund's investments. Utilities come as a distant second, accounting for approximately 9% of the portfolio. The remaining sectors, like Consumer Discretionary, Information Technology, and Health Care, represent a smaller portion of the fund's investments.

Peer Comparison

Comparing PFFD with similar exchange-traded funds, or ETFs, provides valuable insights. For instance, the VanEck Preferred Securities ex Financials ETF ( PFXF ) focuses on preferred shares from various sectors, excluding financials. PFXF has shown significant performance in the past, outperforming PFFD on a 1-year, 3-year, and 5-year basis. However, PFFD itself offers competitive features like a low expense ratio and high yield potential, which make it an attractive investment option. And if Financials run, PFFD likely leads.

Pros and Cons of Investing in PFFD

Investing in PFFD comes with its set of advantages and disadvantages. On the positive side, PFFD has a low expense ratio compared to its competitors, making it a cost-efficient option. Moreover, the fund provides attractive yield potential due to its focus on the preferred securities market.

However, there are also risks associated with PFFD. The fund has a high exposure to the financial sector, which could lead to underperformance in a tech-led market. Additionally, PFFD is exposed to interest rate risk, as preferred stocks behave similarly to bonds, and their prices can decline when interest rates rise.

Conclusion

In summary, the Global X U.S. Preferred ETF presents a compelling investment opportunity for those seeking high yield potential and portfolio diversification. Although Global X U.S. Preferred ETF's high exposure to the financial sector could pose certain risks, its low expense ratio and competitive yield make it an attractive option. And if Financials start to run as I expect they might, this becomes a unique play to consider.

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