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Dion's Weekly ETF Blog Wrap

ETFs for Preferred Investors

8/18/2010 12:45 PM EDT

The Wall Street Journal reported today that General Motors will include preferred stock as part of its upcoming initial public offering -- a reflection of the passion for yield we've seen lately.

I discussed in yesterday's closing post some funds that cover high-yield corporate debt, but with all the buzz this morning around GM, it's certainly worth looking at preferred stock.

Investors looking for an ETF that tracks preferred stock have several options.

One such fund is the iShares S&P U.S. Preferred Stock Index (PFF). This heavily traded ETF is a good choice for investors who want preferred stock to take up relatively small portions of their portfolios and who understand the risks specific to this fund. Nearly 90% of PFF's underlying holdings are dedicated to the financial sector -- a slice that might be too big for some investors to stomach.

Another ETF that tracks preferred stock is the PowerShares Preferred Portfolio ETF (PGX). While this fund has about half the average daily trading volume of PFF, it is still liquid enough for nearly every investor. And, although PGX is also weighted heavily toward financials (80% percent), the fund attempts to apply more criteria to portfolio selection than some other ETFs. This is a pick for the slightly-less-risk-averse investor.

If you're intent on owning preferred stock in the financial arena, the PowerShares Financial Preferred ETF (PGF) could be the right fund for you. But this fund's focus on global financials might be too narrow if you're looking for a long-term pick.

While other preferred-stock ETFs have popped up, they're not worth listing here due to their anemic volume. Performance-wise, PFF, PGX and PGF are up 13.58%, 10.31% and 13.39% respectively. Who knows? Maybe GM's new preferred shares will soon be among the ranks of these ETF's components.

At the time of publication, Dion Money Management held no positions in the stocks mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.
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