Illinois-based investment firm Elkhorn Investments has launched an exchange-traded fund offering access to investment grade preferred shares of US companies. The Elkhorn S&P High Quality Preferred ETF (Bats: EPRF) is designed to give investors regular income-generating securities while still being able to participate in the upside potential of the firm.
Ben Fulton, CEO of Elkhorn Investments.
The Elkhorn S&P High Quality Preferred ETF tracks the S&P US High Quality Preferred Stock Index. The index selects US-listed fixed-rate preferred issues with investment grade status (those rated BBB- or higher from one of the three major ratings agencies: Standard & Poors, Fitch or Moodys). When weighting constituents, the index favours cumulative preferred stock (those that prioritise paying preferred shareholders over common shareholders in the event that prior dividends were withheld) over non-cumulative preferred stock.
“Preferreds remain an area of strong investor interest given their relative high income,” said Ben Fulton, CEO of Elkhorn Investments. “We are excited to launch the first high quality preferred ETF, offering investors access to higher income through preferred securities without sacrificing credit quality. Just as investors have preferences for high quality stocks and bonds, we see similar demand for high quality preferreds and are excited to add EPRF to our product lineup.”
“Investment grade and cumulative preferreds have historically provided lower drawdowns compared with the broader preferred market,” added Graham Day, Head of Product and Research at Elkhorn. “EPRF is unique in that it offers preferred investors tactical opportunities to improve the credit quality of their preferred allocation. Most preferred ETFs on the market today tend to overweight junk rated issues which can negatively impact the portfolio in down markets.”
“One of the benefits high quality preferreds can provide is portfolio diversification due to low overlap with existing preferred strategies in addition to enhanced income return over time,” says Kevin Horan, Director, Fixed Income Indices, at S&P Dow Jones Indices.
As of 24 May 2016 the Elkhorn S&P High Quality Preferred ETF has 105 holdings with significant exposure to the financials (86.6%) and utilities (11.4%) sectors. The largest holdings in the fund is Aegon (2.8%), SCE Trust (2.8%) and Kimco Retail Properties (2.8%). The yield of the underlying index as of 16 May 2016 was 5.75%.
The total expense ratio of the fund is 0.47%.
While the newly launched fund is the first of its kind to target only investment grade preferred shares from US-listed companies, there are a number existing ETFs offering exposure to segments of the preferred share market. The largest by assets under management (AUM) include the:
iShares US Preferred Stock ETF (PFF)
As of 25 May 2016 the fund held $15.5bn in AUM. Through tracking the S&P US Preferred Stock Index, the ETF offers passive exposure to the broad US preferred share market, including both investment grade and speculative grade issues. There are 288 holdings in the fund which has significant exposure to banking firms (42.5%), diversified financials (17.2%), real estate firms (13.3%) and insurance firms (9.0%). The 12 month trailing yield of the fund is 5.80%. TER – 0.47%.
PowerShares Preferred Portfolio ETF (PGX)
As of 25 May 2016 the fund held $4.0bn in AUM. Through tracking the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index, the ETF tracks the performance of fixed rate US dollar-denominated preferred securities issued in the US domestic market. There are 239 holdings in the fund which has significant exposure to financials (85.0%), utilities (6.4%), and telecommunication (4.5%) sectors. The yield of the fund is 6.19%. TER – 0.50%.
PowerShares Financial Preferred Portfolio ETF (PGF)
As of 25 May 2016 the fund held $1.6bn in AUM. Through tracking the Wells Fargo Hybrid and Preferred Securities Financial Index, the ETF offers exposure to a market capitalization weighted representation of preferred securities traded in the US market by financial institutions. There are 92 holdings in the fund which has significant exposure to HSBC (6.8%), Barclays (3.8%), and Wells Fargo (3.3%). The yield of the fund is 6.17%. TER – 0.63%.