PFF iShares Trust iShares Preferred and Income Securities ETF

Market Vectors, the ETF brand from investment company Van Eck, has announced the latest addition to its lineup, the Preferred Securities ex Financials ETF (PRXF). The new fund looks to be the company’s first product in the increasingly popular preferred stock segment of the ETF world, but with a twist.

PRXF will be the first of the group to exclude financial companies from its portfolio, giving the fund a completely different exposure profile than other products in the space. In fact, the most popular preferred stock ETF on the market today, the S&P US Preferred Stock Fund (PFF), puts more than 75% of its assets in the broad financial space, including more than one quarter in financial services and roughly 23% in banks.

Clearly, the exclusion of financials could give PRXF a leg up on the competition and help to differentiate the fund from a number of others in the space. The company also believes that the removal of financials could actually result in a lower volatility product as well (see more in the Zacks ETF Center).

In fact, according to Market Vectors’ research, financials have been the most volatile sector over the past five years by a wide margin. By some estimates, the standard deviation has been nearly double that of non-financials, despite paying out just under 20 basis points more in yield per year.

Since investors don’t really have to give up too much in yield in order to reduce their volatility by a pretty wide margin, PRXF could see some solid inflows from a number of yield hungry investors. It also doesn’t hurt that the product looks to cost just 40 basis points a year in net fees, putting it at the low end of the preferred stock market spectrum (see The Guide to Preferred Stock ETF Investing).

Preferred ex-Financials ETF Methodology in focus

In order to accomplish this objective, PFXF follows the Wells Fargo Hybrid and Preferred Securities ex Financials index. This benchmark looks to give broad exposure to the publically traded non-financial preferred securities market, including securities which the index firm deems to be functionally equivalent to preferred securities such as convertibles and perpetual subordinated debt.

With this focus, the underlying index has roughly 68 securities in its basket while the average current yield comes in at 6.8%. Top individual holdings include a nearly 10% holding in General Motors, 3.8% in Apache, and 3.7% in PPL Corp. In total, the top ten holdings account for just over one-third of the total exposure (read Floating Rate Bond ETF Investing 101).

From a sector perspective, REITs account for roughly 30.8% while electric (26.3%), automotive (12%), telecom (7.6%), and insurance (6.1%) round out the rest of the top five from an industry look. Clearly with the inclusion of insurance and REITs, PRXF takes the approach that ex-financials means the removal of just banks and broad financial service firms, not necessarily a bad thing, but an item that investors should be aware of nonetheless.

Still, given the high yield on the product and the relatively unique structure/exposure, PRXF could find a great deal of assets in the extremely competitive space. The preferred stock ETF market already has over $13 billion in total AUM so it could be a challenge, at least while volumes are quite low (read Invest Like The One Percent with These Three ETFs).

However, the exclusion of financials could draw in plenty of investors who were put off by the other choices in the market which were heavily concentrated in this particular market segment, but are still searching for robust yields.

The product could also act as either a compliment or a substitute to the rest of the preferred stock ETF space so expectations in terms of inflows are probably high at Van Eck for the Preferred Securities ex Financials ETF as it begins the process of accumulating funds from payout-starved, but financials-shunning investors around the country.

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