Global X Variable Rate Preferred ETF (PFFV): A Rising Rate Resilient Income Machine

In an era of persistent rate hikes and heightened volatility, income-seeking investors face a critical challenge: how to secure yield without exposing themselves to the ravages of rising interest rates. Enter the Global X Variable Rate Preferred ETF (PFFV), a fund designed to thrive in precisely this environment. By combining a unique variable rate structure, a concentrated but high-quality financial sector focus, and a cost advantage over peers, PFFV offers a compelling alternative to traditional fixed-income assets. Let's dissect why this ETF could be a cornerstone of resilient income portfolios.

Portfolio Composition: Anchored in Financials, Structured for Flexibility

PFFV invests in a basket of U.S. variable rate preferred stocks, primarily issued by financial institutions like Goldman Sachs, Bank of America, and Morgan Stanley. These securities account for roughly 73% of the portfolio, with top holdings including issuers such as Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC).

This sectoral focus is intentional. Financial institutions often issue preferred stock to bolster capital reserves, and their variable rate terms allow coupons to reset upward in a rising rate environment. Unlike fixed-rate bonds, which decline in value as rates rise, PFFV's holdings avoid duration risk—a critical advantage. The fund's duration profile is negligible (often under 2 years), meaning its price sensitivity to rate changes is far lower than traditional fixed-income instruments like Treasuries or investment-grade bonds.

Expense Ratio: A Cost Advantage in a High-Fee World

PFFV's expense ratio of 0.25% is a standout feature. As of April 2025, this fee is 50% lower than the average expense ratio of its peer group, according to ETF.com. This margin is no small detail: over time, even small fee differences can erode returns. For income-focused investors, this cost efficiency amplifies PFFV's already attractive yield.

Trailing Distribution Yield: High Income, with a Return-of-Capital Nuance

The fund's trailing 12-month distribution yield stands at 7.23%, a robust figure in a low-yield world. This yield is generated by the dividends from its preferred stock holdings, which often carry higher payouts than common shares. However, investors should note that approximately 20% of this yield is classified as a return of capital, per the fund's 19a Notice. While this reduces investors' tax basis, it underscores the importance of viewing PFFV as a long-term income generator rather than a pure capital preservation tool.

Historical Performance: Outpacing Benchmarks in Rising Rates

PFFV's track record supports its thesis. Over the past year (as of Q2 2025), it returned 9.11%, nearly matching its benchmark, the ICE U.S. Variable Rate Preferred Securities Index, which gained 9.39%. Since its 2020 inception, PFFV has delivered a cumulative 29.69% return, slightly trailing its index's 31.05% but demonstrating consistent performance.

The fund's monthly volatility has been muted compared to broader equity markets. For instance, in December 2024—a month of Fed rate uncertainty—the fund fell just 1.31%, outperforming the S&P 500's decline of 2.5%. This stability underscores its lower beta profile, making it a potential ballast in equity-heavy portfolios.

Why Investors Should Consider PFFV

1. Rising Rate Resilience: Variable coupons insulate income from rate hikes, while short duration protects against capital losses.
2. High Yield: A 7.23% trailing distribution in an environment where 10-year Treasuries yield 4.5% is compelling.
3. Quality Focus: Financials dominate the portfolio, but these are large, well-capitalized institutions with stable dividend histories.
4. Cost Efficiency: The 0.25% expense ratio ensures more of your returns stay in your pocket.

Risks to Consider

• Sector Concentration: Over 70% in financials means PFFV's performance hinges on bank health. A recession or regulatory crackdown could pressure valuations.
• Credit Risk: Preferred stocks rank behind senior debt in bankruptcy, though the issuers here are generally investment-grade.
• Return of Capital: The 20% return-of-capital component may reduce tax efficiency over time.

Investment Recommendation

PFFV is a must-consider for income investors seeking to hedge against rising rates. Its structure mitigates duration risk while offering yields superior to most fixed-income alternatives.

Target Investors:
- Retirees or savers prioritizing steady income.
- Portfolio diversifiers looking to reduce equity exposure without sacrificing yield.
- Rate-sensitive investors who want to avoid bond market meltdowns.

Avoid if:
- You require pure capital preservation.
- You're averse to financial sector risk.

In conclusion, PFFV exemplifies the adage that structure matters more than sector in volatile markets. By leveraging variable rates and a high-quality financials core, it offers a pragmatic solution for investors navigating today's rate-sensitive environment.