PREF: Preferred ETF With Low Volatility But Some Risks

The Principal Spectrum Preferred Securities Active ETF (PREF), an actively managed fund with a 0.55% expense ratio, maintains a low-risk profile due to its 99% investment-grade holdings, predominantly in the financial sector (77.9%). While PREF has generated a 40% total return since its July 2017 inception, outpacing inflation and some bond benchmarks, its share price has declined by 4.6%, and annual distributions have decreased by 12% since 2018, resulting in significant inflation-adjusted capital and income erosion. Compared to peers, PREF offers lower volatility but also lower yields and risk-adjusted returns, with its heavy financial exposure presenting a systemic risk, suggesting alternatives like VRP or PFXF may offer superior performance or diversification.

Analysis

The Principal Spectrum Preferred Securities Active ETF (PREF) positions itself as a low-risk, actively managed fund, evidenced by its portfolio of 99% investment-grade securities and the lowest volatility and maximum drawdown among its peers. However, this conservative profile is undermined by several critical factors. Despite a total return of 40% since its July 2017 inception—outpacing inflation (32%) and the LQD bond benchmark (24%)—the fund's share price has declined by 4.6%, and annual distributions have fallen 12% since 2018. This indicates a significant erosion of both capital and income in real, inflation-adjusted terms for long-term shareholders. Furthermore, the fund's heavy concentration in the financial sector, which constitutes 77.9% of assets, introduces a substantial, non-measurable systemic risk. When benchmarked against competitors, PREF's performance is subpar; it offers the lowest 12-month yield and delivers inferior total and risk-adjusted returns (Sharpe ratio), with alternatives like VRP and PFXF demonstrating superior performance metrics.

Key Decisions for Investors

• Given the sustained erosion of both capital value and income streams, with a 4.6% share price decline and a 12% drop in distributions since 2018, current income-focused investors in PREF should reconsider their position as the fund has failed to preserve purchasing power.
• Investors should be cautious of the significant, uncompensated systemic risk stemming from PREF's 77.9% allocation to the financial sector, a concentration that is not justified by its lagging yield and risk-adjusted returns relative to peers.
• For investors seeking exposure to preferred securities, alternatives such as the Invesco Variable Rate Preferred ETF (VRP) and the VanEck Preferred Securities ex Financials ETF (PFXF) warrant consideration, as they offer higher yields, superior risk-adjusted returns, and, in the case of PFXF, diversification away from concentrated banking risk.