The Main Reason of iShares Preferred and Income Securities ETF’s Underperformance

The iShares Preferred and Income Securities ETF seeks to track the investment results of an index composed of U.S. dollar-denominated preferred and hybrid securities. Current 1 Year return comes in as a negative number of around -9%. A major reason for PFF's recent losses is directly related to recent bank failures. At the end of last year, about 1.5% of PFF's holdings were concentrated in the now-defunct First Republic Bank, Signature Bank and Silvergate. Today, the fund still invests directly in most of the large regional banks that face a higher risk of insolvency, including PacWest (PACW), Zions Bancorp (ZION), First Horizon (FHN) and Western Alliance (WAL).

A large number of preferred shares are normally issued by financial institutions, so as the bank crisis has come about, there has been significant pressure on the valuations of this type of stock. That includes even more than just the SVB Bank and Signature Bank preferreds, as bank failures have been mounting and looking like a house of cards, touching one another. Thus, a large rush into safer assets such as Treasuries to drop their yields, but also fleeing from preferreds to see their prices drop.

PFF's overall exposure to financial institutions remains high, at around 68% of the fund's total. In 2007, during the last banking crisis, PFF's exposure to the sector caused it to quickly lose around two-thirds of its value before a bank bailout. While fewer banks have failed overall compared to 2008, the total assets of failed banks are higher today than in 2008. Of course, today's PFF is more concentrated in the largest banks, so the biggest risk is the rising odds of failures of these banks as well.