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  • ETFs

    Hone In On Income Not Financials

    August 16, 2016
     

    As the search for yield continues, preferred securities have become a beacon of potential income. However, a large proportion of the preferreds universe, approximately two-thirds, is made up of traditional financial companies, including banks.1VanEck VectorsTMPreferred Securities ex Financials ETF (PFXF) offers the yield potential of preferreds, but without the excessive financials sector exposure.

    Competitive Yield Potential

    Excluding traditional financials from the preferreds universe has not meant giving up the yield potential. PFXF's underlying index, Wells Fargo®Hybrid and Preferred Securities ex Financials Index yielded 6.1%, as compared to 5.7% from the broad-based Wells Fargo®Hybrid and Preferred Securities Aggregate Index, as of July 31, 2016.2

    Attractive Risk/Return Tradeoff

    While the impact on yield has been negligible, the two-thirds concentration in financial preferreds has had a significant influence on returns. This concentration may not always be a negative factor, but is one worth considering. For example, the 2008/2009 credit crisis clearly showed the market that when financials sell off, they can do so significantly. In addition, excluding traditional financials allows for greater participation in other sectors, such as energy, utilities, and consumer staples. As shown in the chart below, avoiding financial preferreds contributed to over 5% outperformance year to date.3

    Annualized Standard Deviation vs. Annualized Return
    01/01/2016 to 7/29/2016

    Source: FactSet, Bloomberg. Data as of July 31, 2016. Past performance is no guarantee of future performance. Index performance is not indicative of Fund performance. Indices are not securities in which investments can be made. See index descriptions and additional disclosure below.

    Excluding traditional financial companies does not mean excluding the attractive income-producing Real Estate Investment Trusts (REITs) segment.4In fact, REITs, along with other exchange-listed real estate companies, will be removed from the Global Industry Classification Standard (GICS®)5Financials sector and placed in the new Real Estate sector at the end of August.6We believe that this separate sector classification indicates REITs have become a more robust segment of the market. One positive impact may be increased institutional demand for REITs, as investment managers tend to keep pace with their benchmarks' sector weightings.

    PFXF helps limit the unnecessary concentration of financial preferred securities without sacrificing yield potential. Investors who target preferred securities for the yield potential, can do so without piling on to their existing financial sector exposure that may be found with current fixed income and equity investments.

    Click here to view standardized performance and yields for PFXF.