What is PFXF? (Pros, Cons, and Strategies)

If you're considering diversifying your investment portfolio with preferred securities while avoiding the financial sector, PFXF might be an appealing option. The VanEck Vectors Preferred Securities ex Financials ETF (PFXF) offers a unique approach to preferred stock investing by excluding the traditionally volatile financial sector. In this post, we'll delve into what PFXF is, its benefits and drawbacks, and optimal strategies for incorporating it into your investment plan.

What is PFXF?

PFXF is a preferred ETF designed for investors who want exposure to preferred securities without the financial sector's risk. Managed by VanEck, PFXF stands for VanEck Preferred Securities ex Financials ETF.

PFXF seeks to track the performance of the Wells Fargo Hybrid and Preferred Securities ex Financials Index. This index includes preferred stocks and other hybrid securities but excludes those issued by financial institutions, making it a unique and often more stable investment.

Key Features of PFXF

• Excludes preferred securities issued by financial companies
• Focuses on companies from sectors such as real estate, utilities, and industrials
• Offers a diversified exposure to non-financial preferred securities

After selecting the appropriate securities, the index is rebalanced regularly to ensure it remains accurate and reflective of current market conditions.

PFXF Composition

PFXF includes a diverse mix of preferred securities from multiple sectors. You can expect to see companies like NextEra Energy (NEE), Duke Energy (DUK), and Southern Co (SO), which offer some stability due to their long-term business models and reliable income streams.

Pros of PFXF

Diversified Sector Exposure

One of PFXF's main advantages is its diversified sector exposure. By excluding financials, investors gain access to preferred securities from sectors like utilities, telecommunications, and real estate, which often have different risk and return profiles compared to the financial sector.

Lower Volatility

Financial stocks and preferred securities can be highly volatile, especially during financial crises. By excluding financial companies, PFXF tends to exhibit lower volatility and provides a smoother investment ride, especially during economic downturns.

Attractive Dividend Yield

Preferred securities are known for their attractive yields, and PFXF is no exception. It typically offers a higher dividend yield than many common stock ETFs, providing a steady income stream for dividend-focused investors.

Cons of PFXF

Sector Concentration Risk

While excluding financials can reduce volatility, it also increases concentration risk in other sectors. For instance, a significant downturn in the utilities or real estate sector could adversely impact the fund's performance, given its higher exposure to these areas.

Interest Rate Sensitivity

Preferred securities are sensitive to interest rate changes. When interest rates rise, the prices of preferred securities typically fall, and vice versa. This sensitivity can impact the NAV (Net Asset Value) of PFXF, especially in a rising interest rate environment.

Potentially Lower Total Returns

While PFXF can provide stable dividends, its focus on non-financial sectors may result in potentially lower total returns compared to a more diversified preferred securities fund, especially if the financial sector performs well.

PFXF Investment Strategies

Considering PFXF for your portfolio involves weighing its benefits and drawbacks to see if it aligns with your investment goals. Here are some strategies to optimize your use of PFXF:

Diversification Strategy

PFXF can serve as a tool to diversify your fixed-income portfolio. By including it alongside other fixed-income investments such as bonds or bond ETFs, you can balance the risk and return profile of your portfolio. The key is not to over-concentrate in any one sector to mitigate sector-specific risks.

Income-Focused Strategy

For income-focused investors, PFXF's attractive yield can provide a steady income stream. Consider allocating a portion of your investment to PFXF to take advantage of its dividends while maintaining a balanced portfolio with other income-generating assets.

Long-Term Holding Strategy

If your objective is long-term stability and income, holding PFXF over an extended period can be beneficial. The lower volatility compared to financial-sector preferred securities can help you ride out market fluctuations while enjoying consistent dividend payments.

Conclusion

PFXF offers a unique approach to preferred securities investing by excluding the financial sector, providing both benefits and challenges. With its diverse sector exposure and lower volatility, PFXF can be a valuable addition to an investor's portfolio, particularly for those seeking stable income and long-term growth. However, it's essential to consider the concentration risks and interest rate sensitivity when investing in PFXF. By employing suitable strategies, you can harness the full potential of PFXF to meet your investment goals.