Playing a Preferred Financial ETF

The PowerShares ETF could be a better way to go. The fund currently has 24 holdings with MetLife Preferred B the largest holding, representing 8.46% of the fund, followed by HSBC Preferred A with a 7.96% weight and ING Preferred at 6.11%.

Those weights are larger than I might have thought. Stock selection for the fund mimics the Wachovia Hybrid and Preferred Securities Financial Index, whose methodology is proprietary.

You may notice that two of the three stocks listed are foreign; in fact, by my count, more than 70% of the fund is foreign. That is not really a problem as I see it, but it is worth noting that PGF has five different issues from Royal Bank of Scotland totaling 22%, ING has four issues totaling 17%, and Aegon is heavy with three issues weighing in, representing 11% of the fund.

While there is no reasonable probability that any of those companies will default, it is worth following what the fund owns and what changes get made in the future.

PowerShares expects the fund to yield in the mid-5% area after paying out a 0.6% fee. That yield would be reasonable, given that investors are having someone else pick stocks for them, but the 0.6% fee seems a tad high.

Accessing the fixed-income market for individual investors can be difficult, and the transparency of the ETF structure could make for an easier hold than other fund structures.

The other day, I asked for input from readers about what they would like to see in the way of new ETFs; fixed-income product is what readers want most. While PGF has its quirks, it provides access to a segment of the market that is not as easy to invest in as Treasuries, for which there are several ETFs.

>To order reprints of this article, click here: Reprints