SPFF: The Time Is Now

Thesis

Global X SuperIncome Preferred ETF (NYSEARCA:SPFF) is an exchange traded fund focused on preferred equity. We have recently covered two of its peers, namely the iShares Preferred and Income Securities ETF (PFF) which we covered here, and the First Trust Institutional Preferred Securities and Income ETF (FPEI) which we covered here.

The reason for this focus resides in the historical sell-off that has occurred in this asset class, driven by the ongoing banking crisis. An investor needs to keep in mind that:

Preferreds are issued primarily by banks and insurance companies. Preferred securities count toward regulatory capital requirements so banks issue preferreds to help them maintain their required capital ratio. Preferreds can also offer issuers structural benefits, lower capital costs and improved agency ratings.

Source: PIMCO

We find the same theme with SPFF - the fund has an overweight positioning in bank preferred securities. The fund is a monthly payer, with an attractive dividend yield:

A retail investor needs to understand that this asset class is fairly cyclical - i.e., it tends to have peaks and 'valleys'. You most certainly do not want to buy SPFF at the peak (low rates, tight credit spreads). Today's environment is ideal for a retail investor to start considering this name - we have rates higher than in the past ten years, and we just experienced a wave of bank defaults that is still reverberating through the system. The time is now to consider this fund given the progression during this cycle.

Analytics

• AUM: $0.2 billion.
• Sharpe Ratio: 0.2 (3Y).
• Std. Deviation: 15 (3Y).
• Yield: 6.65%
• Premium/Discount to NAV: n/a
• Z-Stat: n/a
• Leverage Ratio: 0%
• Expense Ratio: 0.58%

Performance

On a one year look-back, the three funds have very similar return profiles:

On a longer term basis SPFF lags in the cohort:

Do expect this fund to 'snap back' as the rates environment moves lower and the recession passes. The main risk factors driving performance here are rates and credit spreads. As the Fed will be forced to cut rates later this year or in 2024, the underlying preferred securities will gain in value. Similarly, the other risk factor is represented by credit spreads - as the banking environment stabilizes, credit spreads will contract.

Holdings

The fund is overweight financials:

From a credit rating stand-point most names are investment grade:

We have seen during this banking crisis how this can be misleading a bit. All of the names that failed were rated investment grade, and during a bank run fundamental metrics hold little weight. Good news is on the way though - there will be a renewed focus on adding regulation to the space, to prevent a similar event from occurring again.

There are discussions around not only rolling back the 2018 regulation water-down, but also to enhance standards for the now 'mega banks'. In the past weeks we have seen the largest institutions attract over $67 billion in capital to the detriment of smaller institutions. We feel tighter regulation is going to give back better meaning to ratings and allow for risk quantification to return to proper parameters.

The top names in this fund are:

The fund does have concentration risk versus its peers. We can see all top holdings having sizing above 2.5%, whereas its peers usually top out at 1.5% to 2%. This can represent an issue in the outsized event of a large default.

Conclusion

Global X SuperIncome Preferred ETF is an exchange traded fund focused on preferred equity. The fund represents an alternative to the iShares Preferred and Income Securities ETF which we covered here, and the First Trust Institutional Preferred Securities and Income ETF which we covered here. All of these names are cyclical instruments which lose value when rates are higher and bank defaults increase. We are living such a historic period as we speak. They are all un-leveraged names, but SPFF has the highest expense ratio from the cohort. The fund also takes more concentrated single issuer exposures, with the top names on average above 3% of the portfolio. An investor looking at this space and trying to take advantage of the regional banking crisis needs to understand the time is now to purchase one of these funds.