PFFD: Falling Value and Distribution

PFFD Strategy and Portfolio

Global X US Preferred ETF (NYSEARCA:PFFD) began investment operations on 11/09/2017 and tracks the ICE BofA Diversified Core US Preferred Securities Index. It has 211 holdings, a 30-day SEC yield of 6.20% and a total expense ratio of of 0.23%. Distributions are paid monthly. As described in the prospectus by Global X,

The underlying index is designed to track the overall performance of the US preferred securities market. The Underlying Index includes various categories of preferred stock such as floating, variable and fixed preferreds, cumulative and non-cumulative preferreds and trust preferreds.

Constituents must meet minimum quantity, price, liquidity, maturity and other requirements. The index is weighted based on market capitalization, with a cap of 10% for any issuer. Preferred stock takes priority over common stock in paying dividends and liquidation proceeds, but is generally junior to debt and not I have the right to vote. They are considered hybrid assets and their price behavior is between stocks and bonds. The portfolio turnover rate in the last fiscal year was 37%.

The fund is quite concentrated. The top 10 issuers, listed in the following table, represent 48.7% of the asset value. Each of them has several titles in the PFFD portfolio. The top 4 names are large banks, weighing more than 6% individually and 31.9% in total. Risks related to other individual companies are moderate.

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Performance

Since its inception in September 2017, PFFD stock has lost 19% of its value, as shown in the following chart. Cumulative inflation was around 27% over the same time, based on the CPI. It represents a big loss for shareholders, especially in inflation-adjusted value.

The distribution is slowly declining, except for an outlier in 2019 (next chart). Annual distributions fell from $1.40 per share in 2018 to $1.26 in 2023. For shareholders, this represents a 10% loss of income stream over 5 years, while cumulative inflation was about 22%.

As of 1/10/2017, PFFD outperformed a high yield bond benchmark represented by the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). The difference in annualized return is about 1.1%, and the preferred stock ETF also has significantly higher risk as measured in volatility and maximum draw. PFFD offers bond-like return with equity-like risk: the worst of both worlds.

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PFFD vs competitors

The following table compares the characteristics of PFFD and four of the largest preferred stock ETFs:

• iShares Preferred and Income Securities ETF (PFF)
• First Trust Preferred Securities and Income ETF (FPE)
• Invesco Preferred ETF (PGX)
• VanEck Preferred Securities ex Financials ETF (PFXF)

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PFFD has the cheapest fee on this list and the second highest yield. However, it shows the weakest 5-year dividend growth rate. The following chart shows total returns as of 12/9/2017. PFFD is second to last, just ahead of PGX.

Either way, none of these funds look attractive: their share prices have lost between 12% and 21% over that time frame.

PFFD is in the middle of the pack over the past 12 months:

Take away

The Global X US Preferred ETF tracks an index that includes US preferred stocks of all types. PFFD is quite concentrated in early issuers, especially large banks. The performance of PFFD is disappointing: it shows a significant decrease in both value and distribution. Performance measures indicate bond-like return with equity-like risk. Moreover, it underperformed a high-yield bond benchmark and 3 of the largest preferred stock ETFs.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.