PGX: Preferred Stock Fund With Stable Price And Steady Yield (NYSEARCA:PGX)

– by Snehasish Chaudhuri, MBA (Finance)

Invesco Preferred Portfolio ETF (NYSEARCA:PGX) is an exchange-traded fund (“ETF”) that has consistently been paying monthly dividends for the past 15 years, with a yield mostly between 5 and 7 percent. The fund invests in fixed rate U.S. dollar-denominated preferred securities, including senior and subordinated debt securities, mostly rated BBB. The fund was formed on January 31, 2008 by Invesco Capital Management LLC. It has a relatively low expense ratio of 0.5 percent and substantially high assets under management of $5.44 billion.

Almost 80 percent of PGX’s assets are invested in preferred securities of reputed financial institutes and utilities companies. In general, these companies pay steady dividends on preferred securities. These companies also have very low default probabilities, unless a big crisis jeopardizes the global financial system. The 21 percent price loss this year makes this ETF attractive for income-seeking investors. However, there are chances of further price loss, in case interest rates go up, which is likely. Under such a scenario, investors will enjoy a higher yield, and this makes Invesco Preferred Portfolio ETF an interesting fund to track.

PGX Invests Primarily in Preferred Securities of Financial Institutions

Invesco Preferred Portfolio ETF benchmarks itself against ICE BofA Core Plus Fixed Rate Preferred Securities Index, by using representative sampling technique. This index is a market capitalization-weighted index designed to measure the total return performance of the fixed rate U.S. dollar-denominated preferred securities market. The effective duration of the portfolio is 7.35. Effective duration measures the change in the price of a bond to a 1 percent change in the yield of the bond across all maturities and, therefore, a parallel shift of the yield curve by 1 percent.

The fund earns a weighted average coupon of 5.52 percent on its assets. Thus, generating a yield in excess of 5 percent is not difficult for Invesco Preferred Portfolio ETF. Asset quality is a bit poorer than some of its peer funds, as only 1 percent of the entire fund is invested in securities rated (S&P rated) above BBB. However, more than half of PGX’s entire fund is invested in preferred shares of 20 financial institutions, mostly banks and insurance companies. Post-global financial crisis of 2007-08, all these financial institutions are guided by strict guidelines and have proven creditworthiness. Thus, the fund is quite safe from the credit risk or default risk.

These 20 financial institutions included The Allstate Corporation (ALL), Athene Holding Ltd., Bank of America Corporation (BAC), Brighthouse Financial, Inc. (BHF), The Charles Schwab Corporation (SCHW), Citigroup Inc. (C), Capital One Financial Corporation (COF), Equitable Holdings, Inc. (EQH), First Republic Bank (FRC), JPMorgan Chase & Co. (JPM), KeyCorp (KEY), MetLife, Inc. (MET), Morgan Stanley (MS), Prudential Financial, Inc. (PRU), Regions Financial Corporation (RF) SCE Trust, State Street Corporation (STT), Truist Financial Corporation (TFC), US Bancorp (OTCPK:USBML), and Wells Fargo & Company (WFC).

Preferred Stocks are a Better Bet in an Uncertain Market

Inflation, supply shortages, increasing gas prices, and housing prices did not have a positive impact on the market. As the market is highly uncertain, and there are high chances of economic recession, it’s wiser to invest in fixed income securities, as dividends of common shares become highly uncertain. Within fixed income securities, preferred shares provide the scope of future ownership, which investors don’t get in bonds. However, funds that have invested in preferred shares, hardly make any strong bull run. Thus, investors investing in funds like Invesco Preferred Portfolio ETF should rely primarily on current income.

Investors looking to form a portfolio of monthly income streams may largely be benefitted from this ETF. Prices of preferred shares tend to drop when interest rates rise, as the expected real income decreases. This is quite similar to the impact of interest rates on the price of bonds. However, investors who buy when the price is low will likely be able to enjoy a higher yield on their investments. The price of this ETF could drop further in the short run, as the Federal Reserve anticipates continuing to raise rates over the next few months. Due to this, investors may enjoy higher yields as the prices may drop further down.

Major Risks of Invesco Preferred Portfolio ETF

However, Invesco Preferred Portfolio ETF is not devoid of specific risks that all other preferred securities have to counter. In addition, the nature of assets in its portfolio creates further issues in an adverse economic scenario. There are mainly three types of risk – rising interest rates, declining treasury market, and concentration risk. Rising interest rates reduce the real income of investors, despite the fund offering the same yield. Declining Treasury market creates pressure on banks, lowering their creditworthiness, putting additional pressure on preferred equities. Moreover, this fund is highly concentrated on financial institutions, which are prone to any economic crisis. Rising long-term interest rates can also have negative impacts on their balance sheets.

Investment Thesis

The market price of Invesco Preferred Shares ETF dropped by almost 21 percent in 2022. Since the end of the global financial crisis, till the beginning of 2022, the fund has largely traded within a price range of $14 and $15. Even the impact of Covid-19 pandemic-related market crash was felt for less than a month. That means, for almost a period of 12 years, this fund has traded within a narrow range. The current price of $11.8 is thus an attractive one. Income-seeking investors can enjoy a higher yield on their investments if they buy now. However, there are chances of further price loss, as the Federal Reserve is expected to raise further interest rates in the short term. This will enhance the yield even more. Therefore, the investors should hold this fund and buy more shares whenever the price drops.