PFXF: The Smart Play for Income Investors Nervous About Banking Turmoil

The banking sector's wild swings—from Silicon Valley Bank's collapse to Credit Suisse's meltdown—have left investors searching for income solutions that don't tie their fate to shaky balance sheets. Enter the VanEck Preferred Securities ex Financials ETF (PFXF), a fund designed to deliver attractive yields while sidestepping the volatility of banks and thrifts. Here's why it's a top choice for income hunters in this uncertain era.

The Case for Excluding Financials: Banking Sector Risk Isn't Worth the Reward

Traditional preferred ETFs like the iShares Preferred and Income Securities ETF (PFF) allocate 71% of their portfolio to financials—banks, insurance companies, and mortgage REITs. That's a dangerous bet in an era of rising rates, regulatory crackdowns, and fragile consumer confidence. When the Fed hikes rates, banks' margins shrink, and their preferred shares often suffer.

PFXF flips the script by excluding financials entirely, focusing instead on sectors like utilities (26%), real estate investment trusts (REITs) (20%), and telecoms (13%). These sectors are less prone to banking-sector-specific risks, such as loan defaults or liquidity crises. For example, utilities and telecoms rely on stable cash flows from regulated rates and recurring customer bills, making them recession-resistant income engines.

While PFF's yield hovers around 6.2%, PFXF offers a 6.6% SEC yield—a modest premium for the risk reduction.

Lower Duration = Less Sensitivity to Rising Rates

Preferred securities are sensitive to interest rates, but not all are created equal. PFXF's average duration of just 4.5 years (vs. PFF's 5.2 years) means its price is less likely to crater if rates keep climbing. Shorter duration is a critical shield in an environment where the Fed might delay rate cuts to fight inflation.

Utilities alone contribute over 26% of PFXF's holdings, offering 6.8% yields with minimal rate sensitivity. Telecoms, like AT&T, add another 5.9% yield while benefiting from 5G rollout spending.

Call Risk: A Hidden Danger—And Why PFXF Mitigates It

Preferred securities often come with call risk: issuers can redeem shares early if rates drop, leaving investors scrambling for reinvestment. Financials, however, are notorious for aggressive call activity. In 2024, when the Fed paused hikes, banks like Citigroup and JPMorgan called their preferreds en masse, forcing investors into lower-yielding alternatives.

PFXF's focus on non-financials reduces this exposure. Utilities and REITs typically issue longer-dated, non-callable preferreds, locking in income for years. For instance, NextEra Energy's preferred shares (PFXF's top holding) have a 10-year call protection period, providing stability even if rates fluctuate.

Proof in the Performance: Outpacing PFF in Rate Rises

In 2022, when the Fed hiked rates by 425 basis points—the fastest pace in decades—PFF fell 12.3%, while PFXF held up far better, dropping only 7.1%. Why? Its reduced financial exposure shielded it from the banking sector's meltdown.

Fast-forward to 2025: With the Fed's pause-and-assess strategy keeping rates elevated, PFXF's 4.3% annualized return vs. PFF's 1.9% underscores its resilience.

The Bottom Line: PFXF for Income Investors Who Hate Banking Surprises

If you're tired of your preferred portfolio bouncing like a yo-yo every time a bank's CFO gives a speech, PFXF is your antidote. Its sector diversification, lower duration, and call-risk mitigation make it a smarter income play in an era of banking uncertainty and stubbornly high rates.

Action Plan:
- Allocate 10–15% of your income portfolio to PFXF to diversify away from financial-heavy ETFs.
- Pair it with short-term Treasuries to hedge against unexpected rate spikes.
- Avoid PFF unless you're comfortable owning a “banking ETF in disguise.”

In a world where banking risks loom large, PFXF is the steady hand investors need to sleep well at night—and collect a paycheck every quarter.

DISCLAIMER: Past performance does not guarantee future results. Always consult a financial advisor before making investment decisions.