Preferred-Stock ETFs Shine

Preferred stocks are a combination of debt and equity instruments that have become popular in the ETF world in the past year.

As nationalization fears have eased, reducing the volatility in these funds, investors have sought out preferred ETFs as an inexpensive way to access the preferred marketplace.

Currently there are three preferred funds, PowerShares Financial Preferred Portfolio(PGF Quote), iShares S&P U.S. Preferred Stock Index ETF(PFF Quote) and PowerShares Preferred Portfolio(PGX Quote).

All three funds are in positive territory year to date, with PGF leading the pack with a 13.74 return for that period. All three funds have high trading volumes, with PGF taking the top spot with a three-month average daily trading volume of 1.3 million shares.

Preferred ETFs offer investors inexpensive access, diversification and increased liquidity for preferred shares.

Several factors have helped the preferred ETFs gain more attention in the last few months. Since financial companies have been in a weak position due to the ongoing credit and housing market concerns, the yields on their preferred shares have increased significantly.

This has been a good trend for debtlike instruments as investors seek havens that provide their portfolio with income. The payouts provided by preferred securities have the payout advantage of bonds and the tax advantage of common dividends.

Investors looking for regular distributions like the payout schedule provided by preferreds, while the Jobs and Growth act of 2003 reduced the tax on dividends, making payouts from these funds relatively tax efficient.

When it comes to hierarchy, preferred stock has a senior dividend claim to common stock but takes a back seat to bonds. This means that in the event of the issuer becoming insolvent, preferred dividends will be paid before common stock dividends, but only after bond payments have been made.