Financials: Next Domino To Fall

February 22, 2016

This table tells us a few things. First, that PSCF has a higher overall bank exposure, and its bank exposure has performed admirably versus XLF (-20% versus -28%). Additionally, PSCF also has a much higher weighting to REITs: nearly 32% versus 16% in XLF. Both of these factors have contributed to the recent relative outperformance.

It also tells us that FXO has benefited from both a lower bank exposure despite slightly lower performance compared with XLF. Additionally, because of the differing universe and methodology, FXO has the benefit of including “other” exposure not categorized as financials in the GICS methodology, the bulk of which is in software and services (e.g., payment systems). This exposure has performed strongly relative to the broader financial universe.


While not a pure financial play by any means, preferred ETFs are predominantly populated by issuers in the financial industry; namely, banks.

As such, they have some correlation to the financial sector, which has been evidenced as of late by a rather rapid sell-off in various preferred ETFs. Here is a table with YTD performance of various preferred stock ETFs:

Ticker Fund AUM ($M) Performance: YTD Performance: 2016
PFF iShares US Preferred Stock ETF 13,484.80 -6.24% 4.27%
PGX PowerShares Preferred Portfolio 3,556.35 -5.43% 7.92%
PGF PowerShares Financial Preferred Portfolio 1,695.01 -6.08% 9.21%
FPE First Trust Preferred Securities and Income ETF 666.80 -5.20% 6.12%
VRP PowerShares Variable Rate Preferred Portfolio 516.52 -6.95% 3.36%
PSK SPDR Wells Fargo Preferred Stock ETF 386.82 -4.42% 7.74%
PFXF Market Vectors Preferred Securities ex Financials ETF 233.53 -2.90% -1.50%
SPFF Global X SuperIncome Preferred ETF 195.91 -7.20% -2.96%

Because of their hybrid equity and fixed-income characteristics, preferreds have not experienced the same magnitude of drawdown as compared with broad financials—as a point of reference, XLF is down -17.5% on a YTD basis.

To isolate the “rate effect,” here is a chart of the option-adjusted spread (OAS) of the BAML Core Plus Fixed Rate Preferred Securities Index, which is the benchmark for PGX:

As you can see, preferred spreads held relatively steady during the post-July 22 period, where performance heading into 2016 was very strong, outside of a small blip in spreads in December. However, so far this year, it has been a different story. The move has wiped out most, if not all, of the 2015 returns in a mere six weeks (see table above).

The financial effect is magnified by looking at the relative performance of PFXF, which excludes financial securities. It is down only about 3% this year. Conversely, however, it also did not receive the benefit of financials in 2015, as can be seen above.

What This Means To You

It has been a rough market over the latter half of 2015 and thus far in 2016, leading financials to be the third GICS sector to enter a bear market. Interest rates could bounce off the rapid decline we have seen this year, which could provide some tailwind to the sector. However at this point, financials are having a rough go, and relief may not be in sight.

The above constitutes the personal, professional opinion of Clayton Fresk, CFA, and does not necessarily reflect the views of Stadion Money Management LLC. At the time this article was written, Stadion held long positions in PGF and PFF. References to specific securities or market indexes are not intended as specific investment advice. Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Georgia. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-7636 or

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