SPFF - SPFF: Lagging Competitors In An Unattractive Category

2023-12-06 17:38:07 ET

Summary

• Global X SuperIncome™ Preferred ETF is invested in preferred stocks and features a distribution yield of 6.09%.
• The SPFF ETF is heavily concentrated in financial companies, with four major banks representing a large portion of its asset value.
• SPFF has consistently underperformed its competitors, making it an unappealing long-term investment.

Since my first article with a sell rating on Global X SuperIncome™ Preferred ETF ( SPFF ), the exchange-traded fund, or ETF, has lost over 15% in price and 7% in total return, whereas the S&P 500 Index (SP500) went up 10.5%. Eighteen months later, this article confirms my opinion with updated data.

SPFF strategy and portfolio

GlobalX SuperIncome Preferred ETF is a high-yield fund paying monthly distributions. It has 49 holdings, a distribution yield of 6.09%, and a total expense ratio of 0.48%. It started investment operations on 07/16/2012 and tracks the Global X U.S. High Yield Preferred Index. It was previously tracking the S&P Enhanced Yield North American Preferred Stock Index.

As described in the prospectus by Global X ETFs :

The Underlying Index tracks the performance of the highest-yielding preferred securities listed in the United States (…). The Underlying Index is comprised of preferred stocks that meet certain criteria relating to size, liquidity, issuer concentration and rating, maturity and other requirement .

The fund is heavy in financial companies, especially in the banking industry. The next table lists the top 10 holdings, representing 40% of asset value.

However, it is misleading to evaluate risks related to individual companies, because the fund may hold several securities of the same issuer.

In fact, four major banks represent 37% of asset value, each of them weighting between 8% and 10%: Bank of America Corp. ( BAC ), Wells Fargo & Co ( WFC ), JPMorgan Chase & Co ( JPM ) and Morgan Stanley ( MS ).

Performance

Since 8/1/2012, SPFF has lagged the S&P 500 by over 11.2% in annualized return, and a 60/40 portfolio by 6.6% (including distributions). Risk metrics are mixed: volatility is low, but the maximum drawdown is deep, as reported in the next table. The risk-adjusted performance (Sharpe ratio) is inferior to both benchmarks by far.

Distribution history also is underwhelming. The annual sum of distributions went down from $1.07 per share in 2013 to $0.67 in 2022. For shareholders, this is a decrease in income stream of about 37%, while the cumulative inflation has been about 27% in the same time, based on the Consumer Price Index.

SPFF vs competitors

The next table compares characteristics of SPFF and four other 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 ).

Data: Seeking Alpha.

SPFF is the smallest (in assets) and less liquid fund in this list. It is also the most concentrated and has the highest turnover rate. It is in the middle of the pack regarding the distribution yield, but it is the worst performer regarding 10-year and year-to-date price returns, as well as 5-year dividend growth.

The next chart plots total returns since the fund’s inception. SPFF has been consistently lagging its peers.

Total return in 2023 to date doesn't look better:

As reported in the performance table, the annualized return reinvesting all distributions since inception is far below the distribution rate. This is a clue of capital decay. In fact, the share price has lost about 40% since inception. It is much worse than competitors, as plotted on the chart below.

Takeaway

Global X SuperIncome™ Preferred ETF may be an interesting 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 SPFF: most securities with yields above 6% have suffered from decay. Nevertheless, SPFF past performance looks especially bad relative to competitors. Portfolio concentration and weak liquidity make it even less appealing.

For further details see: