Amid the Storm, an ETF for Income, and Maybe Some Growth

This article was written with Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

The 6% yield offered by this ETF is an attractive way to wait out what will likely be a bumpy ride. However, should the economy continue to improve, it might offer some appreciation, too.

The second quarter has proven to be a rough time for investors over the past few years. For instance, in last year’s swoon — during which equities took a peak-to-trough dive of 9.9% coincident with all the hue and cry in Europe, elections, and deficits — it was a time that challenged the intestinal fortitude of even the heartiest investors.

I’m expecting a repeat performance. What with Europe rising to the fore again, oligarchs wondering where their money is, an 8% rise already in what many people are calling an already-overheated market, and earnings season coming with some difficult year-over-year comparisons, all I can say is, hold on to your hat.

If you can hack the volatility, I would say that’s your best bet. But if you can’t, or you need to cash out of some things in a timely manner, there’s perhaps a better strategy. For several investors, and for the GMG Defensive Beta Fund which I co-manage, my firm is recommending/buying the iShares S&P US Preferred Stock Index ETF (NYSEARCA:PFF).

This ETF invests in preferred stocks mostly issued by large US financial services companies. Approximately 65% of the portfolio is invested in diversified financials and banks, with another 18% of the portfolio invested in real estate and insurance companies.

Within the financial services companies, there’s decent diversification among regional banks, money centers, and large financial institutions such as Wells Fargo (NYSE:WFC), BlackRock (NYSE:BLK) and Citigroup (NYSE:C). The largest holding, at 2.46% of the porfolio, is a General Motors (NYSE:GM) preferred. I like the balance sheets of these companies because they are strong, which is paramount in a more conservative portfolio.

Remember though, preferred issues are almost like bonds. Many investors consider them income plays. Because the income feature plays a large hand in the valuation of preferred stocks, they tend to be less volatile. However, preferred stocks still have equity characteristics, and respond to fundamentals such as growth in sales and earnings. Accordingly, the 6% yield offered by PFF is an attractive way to wait out what I think will be a bumpy ride. However, should the economy continue to improve – the harbinger of growth for banks – PFF might offer some appreciation, too.

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