Market Vectors Preferred Securities ex Financial ETF (PFXF)

Van Eck's Market Vectors unit will introduce the first non-financials preferred stock ETF today when the Market Vectors Preferred Securities ex Financial ETF PFXF starts trading. In a yield-starved environment, ETFs tracking preferred stocks have proven popular with invetors, though many of these funds are excessively weighted to financial services names. For example, the $9.3 billion iShares S&P U.S. Preferred Stock Index Fund PFF allocates about 76 percent of its weight to financials while the $1.8 billion PowerShares Preferred Portfolio PGX devotes more than 92 percent of its weight to financials. Not only will the Market Vectors Preferred Securities ex Financial ETF be the first U.S.-listed ETF to focus on preferred stocks issued by non-financial services firms, it will also be the least expensive preferred ETF with an expense ratio of 0.4 percent. PFXF's index does not classify real estate investment trusts (REITs) as financial services. As such, REITs represent nearly 31 percent of the new ETF's weight. Electric companies account for 26.3 percent of the fund's weight while automotive manufacturers receive an allocation of almost 12 percent. Telecommunications, insurance and energy stocks combine for almost 19 percent. Home to 68 stocks, PFXF has a current yield of 6.78 percent. Just over 40 percent of the ETF's holdings are rated BBB while another 35.3 percent are not rated. An issuer's ability to pay dividends on its preferred shares is an essential component to the issuer's overall credit rating. Missing payments on preferred dividends can lead to lower credit ratings and higher borrowing costs for the issuing firm. Investors have embraced preferred stocks and ETFs because a company's preferred shares often feature higher yields than its common shares and senior debt. Preferred stocks fall in between senior debt and common stock in a company's capital structure. PFXF's top-10 holdings include preferreds issued by General Motors GM, Apache APA, United Technologies UTX and Ford F. The concept of a non-financials preferred ETF might prove appealing to investors and not just because of the robust yield. Over the past five years, financials have been the most volatile sector of the 10 sectors tracked within the S&P 500. The three-year annualized standard deviation for financial preferreds is 15.62 percent compared to 8.34 percent for non-financial preferreds, according to Van Eck data. Prior to Basel III and new additions to the Dodd-Frank Act, large banks were allowed to count trust preferred securities as part of their Tier I capital requirements. The new regulatory backdrop has prompted banks to redeem more preferreds as they become callable. That scenario may prove beneficial for non-financial preferreds, according to Van Eck. PFXF, which will be the 50th Market Vectors ETF, is expected to pay a monthly a dividend. Including PFXF, Market Vectors has introduced seven ETFs this year.