New York, United States – The Global X Variable Rate Preferred ETF (NYSEARCA: PFFV) may not be the ideal investment choice, as several factors suggest a potential sell-off. One of the primary reasons is the nature of the ETF, which invests in Variable Rate Preferred Shares. These shares have dividends that fluctuate with short-term interest rates, and the current market signals a downward trend in rates. With trillions of dollars backing this collective judgment, the outlook for PFFV appears bleak.

Moreover, historical data shows that Preferred Shares as an asset class have often underperformed in the latter half of the year. This trend is exacerbated by negative returns in autumn due to new issuances by banks following the Federal Reserve’s stress tests. For investors in PFFV, this translates to considerable downside risks and limited upside potential.

While Preferred Shares can provide income, experts caution against viewing them as long-term investments, citing their tendency to underperform other asset classes over time. Since its inception in 2020, PFFV has failed to deliver significant returns, leaving investors questioning its viability compared to alternatives like T-Bills.

The S&P U.S. Preferred Stock Index, comprising 214 issues with an aggregate par value of over $100 billion, sheds light on the dynamics of the preferred share market. Majority of the index’s holdings belong to financial institutions, particularly banks, using preferred shares as quasi-equity for regulatory compliance. Real estate follows as the second-largest sector, indicating a concentrated market structure.

Furthermore, the index reveals heavy exposure to specific issuers, with top holdings including big names like JPMorgan Chase & Co., Bank of America Corporation, Citigroup Inc., and Wells Fargo & Company. These concentrations raise concerns about diversification and risk management within the preferred share market.

For investors considering PFFV, understanding its holdings and credit quality is crucial. With a significant portion of BBB rated securities in its portfolio, PFFV’s high dividend yield reflects the relatively poor credit quality of its assets. Additionally, the inverted Yield Curve and prevailing short-term interest rates contribute to the ETF’s attractiveness for income-seeking investors.

PFFV’s investment strategy in preferred shares with fluctuating dividend rates tied to reference rates like SOFR adds complexity to its risk-return profile. While the ETF offers diversification through owning 55 different preferred shares with an AUM of $250.74 million, its concentration in select issuers like Goldman Sachs and Morgan Stanley warrants caution.

Looking ahead, market indicators point to a potential decline in short-term interest rates, impacting the dividends and performance of PFFV. As investors weigh their options, the seasonal weakness of preferred shares in the second half of the year calls for a reassessment of long-term investment strategies.

In conclusion, the challenging market conditions and historical performance trends position PFFV as a sell candidate, urging investors to consider alternative investments for better returns and risk management.