NEW YORK ( TheStreet) -- Over the weekend the Barron's cover story was about how to construct an income portfolio. Oddly, the article left out preferred stocks and preferred stock ETFs -- surprising especially since last week iShares launched the iShares S&P International Preferred Stock Index Fund (IPFF).
Financial institutions issue by far the most preferred stock and, indeed, financials make up 84% of this new fund. But fortunately there is no exposure to the eurozone. Canada is the largest country at 73% followed by the U.K. at 10% and New Zealand at 8% before getting smaller from there.
The larger issuers in the fund include Swedbank from Sweden, Quayside Holdings and Kiwi Capital Securities which are both from New Zealand, energy company Transcanada and the large Canadian banks like Royal Bank of Canada and Toronto Dominion.
Knowing the RisksCurrency values pose a risk to this ETF. If the dollar were to go up a lot, as it did in 2008, then investors should expect IPFF to go down a lot. This is not necessarily an argument against buying the fund, but for having proper sizing in a fixed income portfolio. The other big risk is the nature of preferred stocks trading during a crisis. In 2008, we saw preferred stocks in the U.S. and the UK drop by more than 50%. If the fundamentals in Canada were to go through something similar then it is logical to expect the preferred stocks from the Canadian to also drop by more than 50%. I think this is an extremely remote possibility but 2008 sets a baseline of worst-case scenarios for many asset classes, not just preferred stocks. It is worth noting that the preferred stocks of the surviving banks did recover.
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