The Basics of PowerShares Financial Preferred

By Dan Caplinger | September 14, 2012

The Motley Fool has helped ordinary people become better investors for nearly two decades. This month, we're reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence.

Along those lines, I'm planning to take a look at some different types of investments that many people aren't as familiar with, as well as the popular exchange-traded funds that allow you to make those investments. Today, I'd like to focus on the PowerShares Financial Preferred ETF (NYSE - PGF).

Why buy PowerShares Financial Preferred?

Earlier this week, another article in this series took a lengthy look at how preferred shares work and the advantages and disadvantages they have compared to regular common stock. But one of the reasons so many financial companies issue preferred stock is that they tend to have greater capital needs than ordinary companies. As a result, even preferred stock ETFs that don't have the primary mission of looking at financial preferreds end up owning a lot of them.

The PowerShares ETF dispenses with trying to find any non-financials at all, instead owning 55 different preferred stocks. Its top holdings include several of the biggest, best-known banks in the world, including Bank of America (NYSE - BAC), BB&T (NYSE - BBT), and MetLife (NYSE - MET).

A big advantage of preferred stocks from financials is that during the financial crisis, many banks, including B of A and BB&T, had to cut their dividends dramatically. Although BB&T and US Bancorp (NYSE - USB) are among the many banks that have been allowed to boost their common payouts, they still lag well behind where they were before the crisis. Meanwhile, B of A's common yields just 0.4% at current levels. By contrast, the PowerShares ETF has a yield of almost 6.4%, paying investors $640 in dividends for every $10,000 they invest.

The PowerShares ETF is also somewhat pricey, with annual expenses of around $66 for every $10,000 you invest. But for one-stop exposure to financial preferred stocks, it may be worth the added cost.

Learn more

Preferred stock can be useful, and if you like financials, then PowerShares Financial Preferred has the focus you're looking for. To learn more about PowerShares Financial Preferred, use this link to the ETF's main information page.