A New Preferred ETF On The Cheap

A common tactic among issuers of exchange-traded funds when bringing new products to market that are similar to existing funds is to undercut established rivals on fees. That is what Global X did Wednesday when it launched the Global X U.S. Preferred ETF PFFD.

The Global X U.S. Preferred ETF charges 0.23 percent per year, or $23 on a $10,000 investment, well below the preferred ETF category average of 0.48 percent. The iShares U.S. Preferred Stock ETF PFF, the largest preferred stock ETF trading in the U.S., has an annual expense ratio of 0.47 percent.

Preferred stocks are hybrid securities with bond- and equity-like traits. The asset class is beloved for its high yields and regular dividends, but that also makes it vulnerable to rising Treasury yields. Preferred stockholders rank ahead of common equity investors in the event of issuer default or bankruptcy. While not guaranteed, preferred dividends are priorities for issuing companies because failure to pay preferred dividends can harm a company's credit rating.

More About The New Preferred ETF

PFFD tracks the BofA Merrill Lynch Diversified Core U.S. Preferred Securities Index, providing investors with broad-based exposure to U.S. preferred securities.

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Preferred stocks “play an important role in potentially improving a portfolio's yield, which may be particularly appealing to investors during this persistently low interest rate environment,” said New York-based Global X in a statement. “Preferreds are junior to bonds on a firm's capital structure, therefore often resulting in higher yields than similar fixed income securities. In addition, the income received from preferred stocks is often classified as qualified dividend income, which is taxed at a lower rate than the income received from corporate bonds, which is usually taxed as ordinary income.” 

The new ETF's “underlying index includes fixed, floating and variable-rate preferred securities with a minimum amount outstanding of $100 million,” according to Global X. Issues are capped at 10 percent of the fund's weight. Currently, the largest issue in PFFD is 3.3 percent of the fund's weight and the new ETF's top 10 holdings combine for just about 18 percent of its weight.

Not The First

PFFD is the second preferred ETF in the Global X stable, following the Global X SuperIncome Preferred ETF SPFF. That ETF debuted over five years ago and now has almost $246 million in assets under management and a 30-day SEC yield of nearly 6.8 percent.

Related Link: Expect More ETF Fee Battles