PGX: 6% Yield And A Decay Story

seekingalpha06-11

Invesco Preferred ETF is a high-yield fund investing in fixed rate preferred securities with at least a B3 rating.The PGX ETF yield is close to 6% and 67% of the portfolio has an investment grade.PGX ...

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href=https://seekingalpha.com/article/4698626-pgx-6-percent-yield-and-a-decay-story><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Invesco Preferred ETF is a high-yield fund investing in fixed rate preferred securities with at least a B3 rating.The PGX ETF yield is close to 6% and 67% of the portfolio has an investment grade.PGX ...</p>\n\n<a href=\"https://seekingalpha.com/article/4698626-pgx-6-percent-yield-and-a-decay-story\">Source 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paying monthly distributions. It has 263 holdings, a 30-day SEC yield of 5.97% and a total expense ratio of 0.50%. It started investing operations on 01/31/2008 and tracks the ICE BofAML Core Plus Fixed Rate Preferred Securities Index. As described in the prospectus by Invesco, the fund invests in fixed rate U.S. dollar denominated preferred securities. Unlisted preferred securities are excluded, but unlisted senior or subordinated debt-like securities are eligible. Securities must be rated at least B3 by Moody's (B- by S&P) and have an investment-grade country risk profile, based on the average of Moody’s, S&P and Fitch ratings. The index is capital-weighted and rebalanced on a monthly basis. The portfolio turnover rate in the most recent fiscal year was 15%. As a reminder, preferred stocks have priority over common stocks in the payment of dividends and proceeds of liquidation, but are generally junior to debt and do not carry voting rights. They are considered hybrid assets and their price behavior is between stocks and bonds.  Portfolio  As of writing, 67% of assets have an investment grade rating (BBB and above at S&P). The credit risk profile is rather on the safer side in the preferred stock universe.   Credit risk profile per S&P rating (Chart: author, data: Invesco) The next table lists the top 10 companies in the portfolio, representing 45.7% of asset value. Each of these companies has several securities listed in PGX holdings.   Issuer Common stock ticker Weight%   $Bank of America Corp(BAC-N)$ BAC 8.34   JPMorgan Chase & Co JPM 8.25   Morgan Stanley MS 5.98   Wells Fargo & Co WFC 4.8   AT&T Inc T 4.26   $Public Storage(PSA-N)$ PSA 3.41   Athene Holding Ltd   3.16   $Capital One Financial Corp(COF-N)$ COF 2.88   Brookfield (group)   2.61   Ford Motor Co F 2.01   Click to enlarge Four major banks represent 27.4% of asset value in aggregate: Bank of America, JPMorgan Chase, Morgan Stanley and Wells Fargo. Performance Since inception, PGX has lagged the S&P 500 (SP500) by 8.2% in annualized return, and a 50/50 stock and bond portfolio by 4.4% (including distributions). Moreover, it shows a significantly higher risk measured in maximum drawdown and a much lower risk-adjusted performance (Sharpe ratio in the table below).     Total Return Annual Return Drawdown Sharpe ratio Volatility   PGX 56.18% 2.77% -66.40% 0.2 15.21%   SPY 446.79% 10.96% -51.48% 0.66 16.14%   50% SPY + 50% BND 210.60% 7.18% -28.07% 0.7 8.90%   Click to enlarge The share price has lost 43.9% since inception, as reported by the next chart. At the same time, the cumulative inflation has been over 51% based on the Consumer Price Index, resulting in a huge loss in inflation-adjusted value for shareholders. PGX share price return (Seeking Alpha) Distribution history is not more attractive. The annual sum of distributions went down from $1.24 per share in 2008 to $0.74 in 2023. For shareholders, this is a decrease in income stream of about 40% in 15 years, once again with a cumulative inflation of about 50%.   PGX distribution history (Chart: author; data: Seeking Alpha) PGX vs competitors The next table compares characteristics of PGX and four popular preferred stocks ETFs:  iShares Preferred and Income Securities ETF (PFF) Invesco Financial Preferred ETF (PGF) SPDR ICE Preferred Securities ETF (PSK) VanEck Preferred Securities ex Financials ETF (PFXF).      PGX PFF PGF PSK PFXF   Inception 1/31/2008 3/26/2007 12/1/2006 9/16/2009 7/16/2012   Expense Ratio 0.50% 0.46% 0.56% 0.45% 0.41%   AUM $4.29B $14.26B $898.88M $773.96M $1.68B   Click to enlarge The chart below plots their 10-year total returns. PGX has lagged the ex-financials ETF PFXF, and is close to other competitors. PGX vs. Competitors, 10-year total return (Seeking Alpha) PGX is the worst performer over the last 3 years: PGX vs. Competitors, 3-year total return (Seeking Alpha) Takeaway  Invesco Preferred ETF may be an interesting trading instrument to capture some market anomalies, but I don’t see it as a long-term investment: both price and distributions went down by about 40% in 15 years, while cumulative inflation was over 50%. PFXF, a preferred stocks ETF excluding financials, looks a bit better, although it has lost about 15% in value and 9% in distribution in 10 years. Capital and distribution decay is not specific to preferred stocks ETFs: many high-yield securities have the same issue.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2442931156"}