PFLD: Good but still nervous about prices (NYSEARCA:PFLD)

Investors are always looking for ways to enhance income streams for their portfolios, while reducing exposure to price risk during periods of rising interest rates and volatile markets. The way you do this is by tightening the duration (sensitivity rates), and through allocation to bonds or preferred securities. Many investors still don’t like bonds, so they instead turn to preferred bonds as a way to get relatively more stable returns. It turns out there is a fund that leans toward the low-duration preferred side – and it is AAM Low Duration and Income Securities ETFs (NYSEARCA:PFLD).

A PFLD is an exchange-traded fund, or ETF, that seeks regular monthly income from a coordinated portfolio of short-term preferred securities. It is the first ETF of its kind as there are no competitors due to its target duration (less than 5 years). I started to November 2019 PFLD is an actively managed fund overseen by Advisors Asset Management LLC. I give them a lot of credit for developing the fund, it is certainly outstanding.

The Fund seeks to track the performance of the ICE-listed Preferred and Mixed Securities Index for a period of 0-5 years, and is an index specifically designed to measure the returns of all US dollar-denominated preferred securities listed on the exchange. Hybrid securities that have an option modification term of less than five years.

Look at the holding

No position currently accounts for more than 2.47%. The fund overall is very diversified given the space it targets.

The mix of holdings results in a slightly higher effective duration than U.S. Treasuries of one to three years. The catch here is that it doesn’t respond much to overall price movement, which is an attractive feature if you’re nervous about the Fed raising interest rates again.

The combination of favorites also results in a very attractive relative yield. Additionally, there is the added advantage that it generates more than US companies without the same degree of credit risk that you would find in a similar target yield.

Sector configuration

The portfolio is heavily skewed towards the banking and financial services sectors, which together make up nearly half of the fund. There are no real surprises here, as they tend to dominate the preferred asset class overall.

Peer comparison: PFLD versus PFF

There are no pure competitors that target short duration such as PFLD. The closest thing we can get is the iShares Preferred & Income Securities ETF (PFF), a much larger and older fund with a similar focus on preferred securities but generally less emphasis on short-term issues. When we look at the PFLD to PFF price ratio, the two funds have performed in a relative range to each other since 2020. There’s not much we can take away here in my view in terms of which is better than the other.

Pros and Cons

One benefit of a PFLD is that the short-term nature of the preferred securities portfolio gives it, in theory, a hedge against rising U.S. interest rates. The other reason is that many preferred fund distributions qualify for QDI treatment and, therefore, have the potential to receive tax-free income.

Negativity? The Fund’s concentrated exposure to the financial services sector comes with sector-specific risks. Another potential drawback is the credit risk of the fund. Although a focus on investment grade and diversification across issuers helps mitigate these risks, widening credit spreads during periods of stress can impact the fund’s performance, as evidenced by its withdrawal in the regional banking crisis in 2023.

Conclusion

For income investors who are weathering the market’s constant fluctuations in interest rate fluctuations and in the pursuit of yield, the AAM Low Duration Preferred & Income Securities ETF is worth considering. The fund combines the value income of preferred securities with a short-term focused approach. Although I don’t think the Fed will raise interest rates in the future, it is still worth considering if you are still nervous about the next direction for bonds and are looking for a different source of income.

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