WFC - PGF: Unattractive Story Of Decay And Volatility

2024-01-19 13:43:02 ET

Summary

• Invesco Financial Preferred ETF invests in fixed rate preferred securities issued by financial companies in the U.S. domestic market.
• The PGF ETF is overweight in banks, shows a high volatility, and has lost over 40% in share price since inception.
• Past performance looks bad relative to a preferred stock ETF excluding financials, making the strategy even less attractive.

PGF strategy

Invesco Financial Preferred ETF ( PGF ) is a high-yield exchange-traded fund, or ETF, paying monthly distributions. It has 99 holdings, a 12-month distribution yield of 6.08%, and a total expense ratio of 0.56%. It started investing operations on 12/01/2006 and tracks the ICE Exchange-Listed Fixed Rate Financial Preferred Securities Index.

As described in the prospectus by Invesco , the fund invests in fixed rate U.S. dollar denominated preferred securities without maturity date (perpetual) issued in the U.S. domestic market by financial companies. Eligible securities must be rated at least B3 by Moody’s or B- by S&P, pay distributions as “qualified dividend income,” and meet some requirements such as minimum outstanding amount and liquidity. The index is capital-weighted and rebalanced on a monthly basis. The portfolio turnover rate in the most recent fiscal year was 15%.

As a reminder, preferred stocks have priority over common stocks in the payment of dividends and proceeds of liquidation, but are generally junior to debt and do not carry voting rights. They are considered hybrid assets and their price behavior is between stocks and bonds.

PGF portfolio

As of writing, 65% of assets has an investment grade rating (BBB and above). The credit risk profile is rather on the safer side in the preferred stock universe.

The fund holds 97 preferred stocks issued by 43 companies. The next table lists the top 10 issuers, representing 63.2% of asset value.

Four major banks represent 40.1% of asset value, each of them weighting between 8% and 12.3%: JPMorgan Chase, Bank of America, Morgan Stanley and Wells Fargo.

Performance

Since inception, PGF has lagged the SPDR® S&P 500 ETF Trust ( SPY ) by 6.3% in annualized return, and a 50/50 portfolio by 3.5% (including distributions). Moreover, it shows a much higher risk measured in volatility and maximum drawdown.

The share price has lost about 41% since inception, as reported on the next chart. In the same time, the cumulative inflation has been about 51% (based on the Consumer Price Index), resulting in a very large loss in inflation-adjusted value for shareholders.

Distribution history is not more attractive. The annual sum of distributions went down from $1.12 per share in 2013 to $0.90 in 2023. For shareholders, this is a decrease in income stream of about 20% in 10 years, while the cumulative inflation has been about 31% in the same time, based on CPI.

PGF vs competitors

The next table compares characteristics of PGF and four popular preferred stocks ETFs:

• iShares Preferred and Income Securities ETF ( PFF )
• Invesco Preferred ETF ( PGX )
• SPDR ICE Preferred Securities ETF ( PSK )
• VanEck Preferred Securities ex Financials ETF ( PFXF )

PGF has the highest fee in this list, and the lowest 4-year average yield (by a short margin, though).

Over the last 10 years, PGF has lagged the ex-financials ETF PFXF, and it is on par with the three other funds.

It has been the worst performer in the last 12 months:

Takeaway

Volatility may make PGF a good trading instrument to capture some market anomalies, but I don’t see it as a long-term investment. Capital and distribution decay is not a specific issue to PGF: many high yield securities have suffered from decay for years. PGF concentration in banks is an additional factor of risk. Past performance looks bad relative to a preferred stock ETF excluding financials, which makes the strategy even less attractive.

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