One ETF That Can’t Be Overlooked if Upcoming Earnings Reports Come Weaker-than-Expected

When mentioning ETFs we usually mean buying some of them at certain entry points and holding them until the realization of a trading idea to get easy exposure to broader asset classes, commodities, or indices. True, it’s extremely unpopular to short-sell the exchange-traded funds. However, this time around volatile markets push us to identify both broad long and broad short ideas, and we don’t see reasons why ETFs should be excluded.

In our yesterday’s Currencies report, we stressed that the elevated U.S. dollar exchange rate depresses earnings of the multinationals. If we look further, it’s easy to predict that dividends will experience compression as well. There is a way to get broad exposure to top dividend stories via an ETF. One of them, iShares Preferred and Income Securities ETF (PFF) is a large and popular holding for exposure to preferred shares. aiming to track the investment results of an index composed of U.S. dollar-denominated preferred shares and other hybrid securities. The fund was established in 2007 and uses the ICE Exchange-Listed Preferred & Hybrid Securities Index as its benchmark. It is highly liquid with an average daily volume of over 4.5 million shares and a rather narrow bid-ask spread.

Its declaration says the fund may invest at least 80% of its assets in the component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the component securities of its underlying index.

The fund has over 500 holdings and hence its sought broad exposure to the entire asset class rather than individual atypical stories is unquestionable. The top 10 holdings include many well-known names like Broadcom (AVGO) and Bank Of America (BAC), as well as less known Avantor (AVTR), Danaher Corp. (DHR) and NextEra Energy (NEE).

The ultra-long duration of preferred shares makes them particularly sensitive to interest rates and bond prices. Preferred shares are also sensitive to equity markets in the sense when common share prices fall rapidly, they tend to drag down preferred shares. Altogether, these arguments make PFF an almost ideal short-this-ETF idea in case we contemplate first evidence of the companies’ earnings weakness in the upcoming reporting season.