Baker says the reason his fund has done well is because of inefficiency within the ETF market. "The inefficiency is the result of the large retail investor presence in the asset class," he says. "The retail investor does not always have access to the same resources (i.e., credit research, access to multiple broker-dealers and exchanges, etc.) as a firm like Nuveen does, putting the retail investor at a competitive disadvantage.
"The ETFs I follow in the preferred space are indexed-based, so are not actively managed, and only invest in $25 par [value] retail securities. It's actually pretty difficult to run a strategy in preferreds without a significant weight to financial services."
Interest in the preferred securities sector has sparked several new offerings. Destra Capital Management, based near Chicago, recently rolled out the Destra Preferred and Income Securities Fund, which invests in a portfolio of preferred and income-producing securities.
The subadvisor is Flaherty & Crumrine, an old-line money management firm. "We like an open-end mutual fund format as opposed to an ETF because of the active management, the in-depth credit analysis and trading expertise," says Peter Amendolair, CIO of Destra.
Naysayers
Not surprisingly, some advisors are not fans of preferred ETFs and preferred funds, citing the portfolios' concentration in financial products and other risks.
Don Martin, the owner of Mayflower Capital in Los Altos, Calif., says he avoids both.
"I think active management is the only solution. I don't trust passive investing. I have heard too many stories where some anomaly occurred that cost more than the savings in management fees."
Likewise, Kokernak of Haven Financial Advisors is not an enthusiast of either preferred ETFs or preferred funds. "I'm not a fan of preferred stock funds due to their heavy concentration in financials. "That's the nature of the beast-most preferred issuers are banks, insurance companies and the like."