PGF ETF's Structural Risks Expose Yield Vulnerability in Rising Rate Environment

The Invesco Financial Preferred ETF (PGF) has long been a go-to vehicle for investors seeking income from financial sector preferred stocks. But as interest rates climb and sector-specific risks intensify, the fund's structural flaws are coming into sharp focus. Its heavy concentration in financials, reliance on fixed-rate perpetual securities, and paltry yield relative to current rate conditions make it a risky bet for income seekers. Here's why investors should think twice—and pivot to alternatives.

The Sector Concentration Trap

PGF's portfolio is a textbook example of overexposure to a single sector. The fund invests 95%+ of its assets in preferred securities issued by U.S. financial institutions, including banks, insurers, and brokerage firms. While this concentration may have served investors during periods of low volatility, it now poses a significant risk. With the Federal Reserve's rate hikes pushing the 10-year Treasury yield above 4%, financial firms—already grappling with thinning margins and elevated credit risks—are under pressure. A downturn in banking or insurance could hit PGF disproportionately hard.

JPMorgan's Dominance and the 11% Exposure Myth

While the fund's largest single holding—JPMorgan Chase—accounts for ~11% of its portfolio, this understates the broader risk. PGF's top five holdings (JPMorgan, Wells Fargo, MetLife, Bank of America, and Allstate) collectively represent over 30% of assets, creating extreme issuer concentration. This clustering amplifies idiosyncratic risks: if one of these institutions faces credit downgrades or liquidity challenges, PGF's NAV could suffer disproportionately.

The Perpetual Problem

The majority of PGF's holdings are fixed-rate perpetual preferred stocks, which lack maturity dates and expose investors to interest rate risk. As rates rise, the value of these securities declines because new issuances offer higher yields. PGF's average duration—a measure of price sensitivity to rate changes—is likely elevated, making its NAV vulnerable to further hikes. Meanwhile, its distribution yield of ~6.39% (as of April 2025) pales compared to the ~4.5% yield on the 10-year Treasury—a stark reminder that PGF's income stream is no longer a “safe” premium.

Why PGF's Yield Isn't Keeping Pace

While PGF's yield is still positive, its fixed-rate structure means it cannot reset upward as rates climb. This leaves investors holding securities that are becoming less competitive. For instance, JPMorgan's lowest-yielding holding (a 0.96% perpetual preferred) is an albatross in a high-rate environment. Meanwhile, the fund's lack of diversification beyond banks and insurers leaves it exposed to sector-specific headwinds like credit downgrades or regulatory crackdowns.

The Better Alternatives

Investors seeking income should consider shorter-duration bond ETFs like iShares Core U.S. Aggregate Bond ETF (BND), which offers ~3.8% yield with an average duration of 6 years—far less sensitive to rate moves than PGF's perpetuals. For those still partial to preferred stocks, sector-diversified ETFs like the Global X U.S. Preferred ETF (PFFD) or SPDR Wells Fargo Preferred Stock ETF (PSK) provide broader exposure to industrials, utilities, and real estate—a hedge against financial sector volatility.

Conclusion: Time to Rebalance

PGF's structural risks—sector concentration, fixed-rate exposure, and anemic yield responsiveness—make it a poor income play in today's environment. Investors should prioritize flexibility and duration management. Shorter-duration bond funds or diversified preferred ETFs offer better protection against rising rates and sector-specific shocks. In a world where every basis point matters, PGF's flaws are too glaring to ignore.

This analysis assumes no specific portfolio goals or risk tolerance. Consult a financial advisor before making investment decisions.