PFF: Preferred stock ETF

Noteworthy ETF Inflows: PFF
Should You Prefer Preferreds in 2013?

Preferred stock confuses beginning investors because its name is misleading. What makes a stock preferred isn't whether it's a smart investment but rather where it lies within a company's capital structure. Most of the time, companies have two main tiers of capital, one they obtain by issuing bonds and the other from making offerings of equity. Bondholders have fixed return potential, as the payments they receive are strictly defined by the terms of the bond, but they also enjoy the highest priority to get repaid no matter what happens to the company. By contrast, equity shareholders have potentially unlimited returns, but they also have to go to the end of the line if the company goes under and often come out with nothing.

Preferred stock lies in the middle of the capital structure. Like bonds, preferred stock typically pays a fixed interest rate and has priority over common shareholders, in that preferreds are entitled to get a certain value back before the common receives payment. Moreover, preferred dividends have advantages that common-share dividends lack, again depending on the terms of the preferred. But when it comes to growth potential, preferred stock doesn't look like stock at all -- it tends to move with interest rates rather than with a company's fundamental prospects. For many investors, the idea of getting solid income without the volatility of common shares may seem like a trade-off worth making
Comment: Image source. Wiki article on Preferred Stock.  PFF provides a nice diversified ETF way to invest in preferred stock. Another option is PGX.

The following features are usually associated with preferred stock:
  • Preference in dividends
  • Preference in assets, in the event of liquidation
  • Convertibility to common stock.
  • Callability, at the option of the corporation
  • Nonvoting
Below images show the top holdings, credit breakdown, and sector holdings of PFF. The yield is 5.95%

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