Investing in Preferred Stock ETFs (Businessweek)

The Preferred Approach

High-yield bonds aren't the only risky asset to benefit from investors' renewed quest for higher returns. Preferred stocks, which trade like equities but earn most of their return from fixed dividends, have more than doubled from their March low—they were down nearly 50% during the first two months of 2009. (The stocks are "preferred" because their holders receive dividends before shareholders of the common stock get paid.)

On Sept. 17, State Street (STT) launched the SPDR Wells Fargo Preferred Stock ETF, which competes with two other exchange-traded funds, the PowerShares Preferred Portfolio (PGX) and the iShares S&P U.S. Preferred Stock Index Fund (PFF). Like those two, the SPDR boasts a hefty dividend yield—topping 8%—and has a portfolio that is more than 80% financial companies. But it tries to reduce some of the risk by maintaining a highly diversified portfolio—it holds 164 securities, more than the other two funds combined (the PowerShares fund has 67, the other 94). Says Matt McCall, a financial adviser with Ridgewood (N.J.)-based Penn Financial Group: "It's a more conservative approach."

—Ben Levisohn