Exchange-traded funds offer a convenient way to invest in various kinds of investments that interest you. If you're thinking that you'd like to add some preferred stock to your portfolio, for their income-producing potential, the iShares S&P U.S. Preferred Stock Index
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Preferred Stock ETF's expense ratio -- its annual fee -- is a relatively low 0.48%. Its dividend yield is an appealing 7.3%, and its beta is 0.21, reflecting much less volatility than the S&P 500.
Don't compare this ETF's performance with the performance of regular stocks. Preferred stocks generally offer superior dividend yields, but less capital appreciation. Still, with the stock market having seen big moves up and down in the past three years, preferreds have done quite well compared to the S&P 500 during this ETF's short history. As with most investments, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
Many of this ETF's components have been making strong contributions to its performance. Below you can see the power of preferred stock, via a comparison of the yield on common vs. preferred stock on some of the companies the ETF invests in:
|
Stock |
Yield on Common |
Yield on Preferred |
|---|---|---|
|
General Motors |
No dividend | 4.86% |
|
Citigroup |
No dividend | 7.28% |
|
ING Group |
No dividend | 7.53% |
|
Archer Daniels Midland |
1.8% | 7.14% |
| Wells Fargo | 0.6% | 7.16% |
|
SunTrust |
0.1% | 7.60% |
|
US Bancorp |
0.7% | 6.50% |
Clearly, you can reap far more income from preferred stock. It's good to read up on preferreds first, though. You need to understand that higher yields are often tied to riskier companies, in order to attract investors willing to take the chance. If a company goes belly-up, it will have trouble meeting its financial obligations to investors. Preferred shareholders get to stand in line ahead of common shareholders, though -- thus their designation as "preferred."
General Motors and the financial companies above got whacked hard during the recent credit crisis, and they're still getting their acts together. General Motors is experiencing strong sales in China, while Citigroup's credit quality is improving. Still, concerns remain over whether banks like Wells Fargo, US Bancorp, and Bank of America will be able to disguise the true value of bad loans. The risks involved with these concerns help prop up preferred yields.
The big picture
A well-chosen ETF can grant you instant diversification into your desired niche -- and can make investing in and profiting from it that much easier. If you haven't looked into preferred stocks before, this ETF can give you a window into preferred investing.
ETFs can help you find the way to better investing results. To find some great ETF investing ideas, take a look at The Motley Fool's special free report, "3 ETFs Set to Soar During the Recovery."
