This Was the Preferred Investment of 2011

As 2011 comes to a close, it's a great time to look back at what happened to the investments that interest you. By making sure you know the important things that happened to stocks and ETFs that you follow -- as well as the setbacks they experienced -- you can make a better decision about whether you have the right investments in your portfolio.

Today, let's take a look at iShares S&P U.S. Preferred Stock (NYSE: PFF  ) . Given just how badly bank stocks did this year, you would think that an exchange-traded fund that focuses on bank-issued securities would have suffered huge losses. But unlike common shares, the preferred stocks of those banks actually held their own, limiting the ETF's losses to a much smaller figure than regular shareholders experienced. Below, I'll take a closer look at the events that moved shares of iShares S&P U.S. Preferred this year.

Stats on iShares S&P U.S. Preferred

2011 YTD Return (2.6%)
Assets Under Management $6.98 billion
Number of Holdings 241
Expense Ratio 0.48%
Dividend Yield 7.2%
CAPS Rating (out of 5) ***

Sources: iShares, Yahoo! Finance, and Motley Fool CAPS.

How did iShares S&P U.S. Preferred hold up so well in 2011?
You wouldn't know it from its name, but the iShares Preferred ETF is dominated by financial companies. Fully three-quarters of the ETF's assets are split among banks, insurance companies, and diversified financials. Moreover, when you look at the investments the ETF owns, you'll find plenty of names whose common shares saw dramatic losses in 2011, including JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Bank of America (NYSE: BAC  ) . Even amid nonfinancial holdings, General Motors (NYSE: GM  ) doesn't stand out as the pinnacle of success during the past year.

But the key to understanding the iShares preferred ETF's success is that it doesn't own those companies' common stocks. Instead, it sacrificed most of the potential upside of common shares in exchange for better yields. During this year of subpar performance for the common stock, that bet paid off, as higher dividends largely offset the capital losses the fund took.

Of course, that doesn't make the ETF risk-free. More than 30% of its assets have junk ratings, and another 30% have only BBB-rated investment-grade shares. But that's consistent with the hunger for yield that many investors have right now, given extremely low rates on Treasuries and other more traditional fixed-income investments.

Going forward, much depends on how financial stocks perform. Overall, the ETF won't give you all of the upside that the common shares would -- but it may also cushion at least part of the blow from a continuing rough patch for financials. If the entire financial system starts to buckle again, though, all bets are off -- and you can't expect this ETF to do much better than the common shares will.

If you want a safer bet on financials, we've got some good leads for you. Read The Motley Fool's latest special report on banking to find out which banks the smartest investors are buying now. The report is free, but it won't be there forever, so check it out today.

Click here to add iShares S&P U.S. Preferred to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Bank of America. Motley Fool newsletter services have recommended buying shares of General Motors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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