Iowa-headquartered investment manager Principal Financial has launched the Principal Spectrum Preferred Securities Active ETF (PREF) on Bats Exchange.
Preferred securities may offer investors higher yields compared to investing in corporate debt markets.
The actively managed fund will invest in a range of preferred securities, including preferred stock, certain depository receipts, and various types of junior subordinated debt, from global companies. It will hold at least 25% of its assets in securities issued by firms from the financials sector.
Preferred securities tend to have both equity- and bond-like characteristics, falling between company debt and common stock in the seniority of the firm’s capital structure. They generally pay a regular fixed or floating dividend, making the security’s price sensitive to changes in interest rates. Although dividends may be suspended by the company’s board without the risk of default, some preferred shares may be cumulative in that unpaid amounts are accrued until the dividend is reinstated.
The security’s equity-like nature characterises it as a perpetual investment, although many preferred securities do have an embedded callable feature, exercisable after a specified time period. This tends to lead to a cap on the potential appreciation of the security’s price.
While preferred securities may offer relatively high yields, the various product structures within the preferred share market can be confusing to investors. This may support the notion of an actively managed investment in the preferred securities market, administered by a team specialising in the different types of yield features, liquidity and covenants associated with different issuers.
As of 10 July 2017 the ETF has 30 holdings and is primarily invested in the international banking (27.7%), US banking (18.6%), multi-line insurance (8.7%), US life insurance (7.9%) and international life insurance (6.5%) sectors.
The fund’s benchmark is the Bank of America Merrill Lynch US Investment Grade Institutional Capital Securities Index.
The total expense ratio of the ETF is 0.55%.
There are a number of existing passively managed ETFs tracking the broader preferred share market. The largest are the:
iShares US Preferred Stock ETF (NYSE Arca: PFF)
Holding $18.4bn in assets under management (AUM), the ETF offers passive exposure to the broad US preferred share market, including both investment grade and speculative grade issues. Underlying the ETF is the S&P US Preferred Stock Index which consists of 290 constituents with a majority exposure in banking firms (40.4%) and diversified financials (22.1%). The ETF is yielding 5.7% and has a TER of 0.46%.
PowerShares Preferred Portfolio ETF (NYSE Arca: PGX)
With $5.2bn in AUM, the ETF tracks the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index, providing exposure to 256 fixed rate US dollar-denominated preferred securities issued in the US market. Financials make up the largest sector weighting at 74.0% with utilities coming in second at 8.7%. The yield of the fund is 5.7% and its TER is 0.50%.