ETF Showdown: Penchant For Preferreds

The hunt for yield has been a prevalent theme for several years, particularly in the wake of so much dividend cutting during the financial crisis. Financials were the unfortunate ring-leaders of the dividend-cutting regime and while they have started to climb back into the dividend game, but even with the recent efforts, this still isn't a great sector for income investors. Unless of course we're talking about preferred stocks. That's where the yields are strong and the dividends are as close to a guarantee as one can get. The issue with preferreds isn't that they aren't useful investments. They are. The issue is that many investors aren't familiar with preferreds because they aren't liquid securities, so the mainstream financial press doesn't spend a lot of time talking about them. Beyond that, some investors may not know where to start with preferreds and that's just one more reason why we have a compelling ETF Showdown today between the PowerShares Preferred Portfolio PGX and the SPDR Wells Fargo Preferred Stock ETF PSK, one of the newest entrants to the preferred ETF game. As we just noted, a big part of the allure with preferred stocks is the yield and PGX takes that cake with a yield of 6.65% compared to 5.89% for PSK. Can PSK make up for that deficiency? Sure. PSK holds 158 securities, more than double what PGX offers exposure to. Plus, PSK wins the fee battle with an expense ratio of 0.45% compared to 0.5% for PGX. On the other hand, PGX is far more liquid with average daily volume of over 411,000 shares compared to just over 18,000 shares for PSK. Preferred issues from Barclays BCS, HSBC HBC and Wells Fargo WFC, among others, can be found among the top-10 holdings in both funds. PSK is less heavy on financials, though with an 83% allocation to that sector compared to more than 88% for PGX, that's not saying much. In fact, it's the weight to financials that makes a tie between PGX and PSK easy to break. PGX gets two points for the better yield and superior liquidity. PSK gets two points for the lower fees and superior sector diversity. So who wins? Neither. While each ETF has its merits, if an investor is going to be this heavy into preferreds issued by financial services firms, just go all the way for 100% exposure to financials and buy the PowerShares Financial Preferred ETF PGF, which by the way, has a better yield than both PGX and PSK.