PGF: A Preferred ETF Of Financial Institutions With Decent And Stable Yield (NYSEARCA:PGF)

~ by Snehasish Chaudhuri, MBA (Finance).

Invesco Exchange-Traded Fund Trust – Invesco Financial Preferred ETF (NYSEARCA:PGF) is an exchange-traded fund (“ETF”) that invests in U.S. dollar-denominated investment grade preferred securities issued by financial companies. It invests only in long-term securities that are rated at least B3 by Moody’s or B- by S&P. More than 90 percent of the preferred stock it holds has a maturity of more than 20 years. All are well-known established financial institutes with a huge asset base.

At its current price, Invesco Financial Preferred ETF provides a yield of 5.4 percent. It pays monthly dividends, but hardly generates any price growth in the stock market. Between 2017 and 2021, annual average total return stood at 5.5 percent. Moreover, PGF’s stable yield offers significant incentive for shareholders. The fund is currently trading at $16, at a marginal discount to its net assets value.

Invesco Financial Preferred ETF Generates Stable Yields and is Less Risky

Invesco Financial Preferred ETF was launched and is managed by Invesco Capital Management LLC. The fund seeks to invest in securities of any maturity, and seeks to track the performance of the ICE Exchange-Listed Fixed Rate Financial Preferred Securities Index, by using representative sampling methodology. This index is a market capitalization weighted index designed to track the performance of exchange-listed, U.S. dollar denominated preferred securities of reputed financial companies. In this low-yield environment, the dividends offered by preferred stock ETFs like PGF are certainly attractive.

The shares have enough volume (about 40,000 shares per day) to keep the bid/ask spread nice and tight. The net expense ratio is 0.57 percent. PGF holds about $1.22 billion in portfolio assets. While all preferreds are less liquid (especially when inventors get panic stricken) the big banks and brokerage firms have a ready outlet for selling those. This is simply because these financial institutes have a huge client base, and also can trade among themselves. In general, preferred shares are less risky than equity shares as all payments to preferreds are made before any payments to common stocks.

PGF’s Portfolio Invests in Preferred Stocks of Established Financial Institutes

Invesco Financial Preferred ETF is non-diversified, but well-spread among over 114 securities. 71 percent of its investments are rated BBB by S&P, and the average credit rating of PFG’s portfolio is BBB-, i.e., rated investment grade. Its portfolio includes preferred stocks of JPMorgan Chase & Co (JPM), Allstate Corp (ALL), The Goldman Sachs Group Inc (GS), Wells Fargo & Co (WFC), Morgan Stanley (MS), Capital One Financial Corp (COF), Citigroup Inc (C), Bank of America Corp (BAC), and MetLife Inc (MET). All are well-known established financial institutes with a huge asset base. PFG’s portfolio has an effective maturity of almost 27 years, i.e., all its investments are in long term securities. This is only possible in a preferred stock portfolio of financial institutes. More importantly, this portfolio also has a relatively low turnover ratio of 23 percent.

Impact of High Interest Rate and Inflation on Preferred Securities Portfolio

Russia’s invasion of Ukraine has disrupted global supply chains. Energy prices have skyrocketed and logistics networks have deteriorated. As the energy prices shot up, input costs for most manufactured goods also went up. Costs for the majority of consumable products have gone up as a result of the supply chain crisis. The inflation rate is expected to remain at the same level, and then come down as the economic situation improves all over the world. However, despite the fund generating the same returns, real income of investors goes down due to a decline in interest rates. This could be a factor leading to a gradual decrease of price of this ETF, even though theoretically it should have moved upwards in an environment of repeated interest rate hikes.

In case the interest rates decline significantly, there is a possibility of reduction in payout. After inflation and taxes, investors’ real return may turn negative. Ongoing economic slowdown has slowed down the financial sector, and for obvious reasons, preferred-stock ETFs have been impacted. The returns generated by financial companies have been a key determinant of returns earned by preferred-stock portfolios. Now, as PGF’s yield stood stable despite the economic turmoil witnessed over the past three years, it can be considered as a safe portfolio. Average credit rating of PFG’s portfolio is of investment grade, with 71 percent of its investments are rated BBB by S&P.

Investment Thesis

Preferred shareholders get a preference in the time of payment of dividend over that of common equity holders. These shares also have a preference over the organization’s assets during the event of liquidation. Due to fixed payout, preferred shares generally generate a higher yield than that of equity shares. Moreover, these yields are much more stable. As the market has become highly uncertain, and chances of recession still persists, investing in fixed income securities becomes a wise option. Moreover, the financial sector is one of the sectors that are expected to generate above-average growth rate in the coming decade. This sector is also considered to be a stable sector.

Invesco Financial Preferred ETF’s attractiveness relies primarily on the stability of its yield. This fund has a relatively good yield, and higher than many other fixed income ETFs. Moreover, it pays monthly dividends. More importantly, Invesco Financial Preferred ETF’s yield is sustainable due to its fixed income. PGF’s portfolio invests in preferred stocks of financial institutes with reasonably higher quality assets and customer base. Steady dividend payout on a monthly basis and high weighted average maturity also suggests that this fund is less risky. Expense ratio is not extremely low, but still can be considered acceptable.

Invesco Financial Preferred ETF is less risky than similar types of preferred share ETFs. In my opinion, income-seeking investors can consider investing in Invesco Exchange-Traded Fund Trust – Invesco Financial Preferred ETF.

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