This Income ETF Protects Against Volatility
Tradition preferred stock ETFs often carry significant interest rate risk due to their long-term nature. Given the current interest rate environment, how does the AAM low duration preferred and income securities ETF, ticker PFLD, balance risk while still aiming for attractive yield income?
PFLD has been our flagship for a number of years. As many folks know, AAM is built off of income, whether it be dividends in the equity space or coupons in the fixed income space. PFLD was the first low duration product in the preferred asset class in the marketplace and today has over $450 million in assets. It's a product that we think is really unique in the marketplace mainly because of what you alluded to.
It's a strategy that provides an allocation that has relatively low correlation to traditional stocks and bond portfolios, low beta, but it also provides high income right through the hybrid and preferred securities market. What we try to do is something that's really important in this type of environment where, while we expect a few rate cuts in 2026, we also expect a lot of volatility.
Unfortunately, those investors that rely on the preferred asset class to gain income often don't realize the amount of duration risk they take on by investing in these securities because these are longer-dated securities. They can be impacted quite a bit by interest rate moves up or down and also volatility. So when we created PFLD and the underlying index for PFLD, it was really capturing the benefits of the preferred and hybrid asset class.
We're talking low correlation, diversification, capital potential for capital appreciation, high income, tax efficient income, but doing it in a way that's much less risky. We do that by the underlying index removing all securities that have effective duration of 5 years or more, which again tones down the duration, so you have less interest rate sensitivity.
We also remove securities on a monthly basis from the portfolio that have a call screen. So if a security is trading north of 105% of face value, that security is automatically removed from the underlying index and therefore removed from the portfolio. Again, we're trying to capture the asset class, but we're trying to capture it in a less risky way.
