The Basics of PowerShares Financial Preferred

Worldwide Invest Better Day 9/25/2012

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, and be sure to follow the Fool's coverage on the ETF using our My Watchlist feature. Also, compare the prospects for common and preferred shares by looking at the Fool's premium report on Bank of America to dig deep into what's happen at the big bank.

Please stay tuned throughout the month for other informative articles covering a wide range of important topics. Let me also encourage you to take a look at the special website we've set up at InvestBetterDay.com. On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.

Fool contributor Dan Caplinger thinks the banks may just be getting started. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. 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's disclosure policy always prefers you.


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