ETF Talk: Preferred Shares Fund Offers Income and Capital Appreciation

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

With the stock market sliding again today, you may be among the investors looking for alternatives to equities. One way to hedge your bets against a falling stock market is to invest in preferred shares. My inclination toward exchange-traded funds (ETFs) as an investment tool leads me to bring the fledgling Global X SuperIncome Preferred ETF (SPFF) to your attention.

For investors seeking higher dividend yields, preferred shares such as those offered through SPFF are an asset class worth considering. Preferred shares are unique because they combine the income-producing characteristic of bonds and the capital appreciation opportunity of equities.

The Global X SuperIncome Preferred ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Enhanced Yield North American Preferred Stock Index. That index is intended to track the performance of the highest-yielding preferred securities in the United States and Canada. SPFF itself is designed to track 50 of the highest-yielding preferred securities from the United States and Canada, the two largest preferred stock markets.

The five largest holdings of SPFF, their yield and their weighting in the fund, as of Nov. 13, were: Credit Suisse PFD 7.9%, 5.03%; American International Group PFD 7.7%, 3.65%; HSBC Holdings PLC PFD 8%, 3.22%; JP Morgan Chase PFD 8.625%, 3.2%; and Prudential Financial PFD 9%, 3.13%. As the names of those holdings indicate, the fund is dominated by financial services and insurance companies.

A big appeal of the fund is that preferred shares generally pay stable dividends with more frequent distributions than common shares. In addition, preferred shareholders are entitled to be paid before common shareholders, if claims are made on a company’s earnings and assets. The seniority of preferred shares, compared to common shares, may provide downside protection if a company is forced to liquidate its assets, assuming all creditors have been paid first.

By screening for the highest-yielding preferred securities and paying monthly dividends, SPFF lets investors diversify their income streams and potentially boost the yield of their overall portfolio.

However, SPFF is fairly new and has shown significant volatility since it began trading in July. For those reasons, combined with its relatively low average trading volume, I am not ready to consider recommending it. But the fund is one that I am monitoring. The following chart shows its per-share price swings.


If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

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