PFF yield trap: Call risk threatens iShares preferred fund returns
Analysis warns that the fund’s 6.5% distribution yield could overstate long-term performance due to high exposure to bank-issued preferred securities with call provisions.
An analysis of the iShares Preferred and Income Securities ETF (PFF) highlights significant structural risks that may undermine its appeal to income-focused investors. The fund, which manages approximately $14 billion in assets, carries an expense ratio of 0.46% and currently trades near $31, reflecting an 18% decline over five years and a 20% drop over a decade. While the fund offers a headline distribution yield of roughly 6.5%, analysts warn this figure may overstate long-term realised returns due to the prevalence of call provisions within its portfolio.
Approximately 60% to 70% of PFF’s holdings consist of preferred securities issued by US banks and insurers, including major institutions such as JPMorgan Chase, Bank of America, and Goldman Sachs. These hybrid securities typically carry call provisions allowing issuers to redeem the notes at par value, usually $25, beginning five years after issuance. This structure creates a ceiling on capital appreciation, as issuers can retire high-coupon debt when market conditions allow, forcing the fund to reinvest proceeds into lower-yielding assets.
The risk materialises when interest rates fall, as banks are incentivised to refinance expensive legacy preferreds. JPMorgan Chase concluded the first quarter of 2026 with strong capital levels and robust earnings, providing ample capacity to refinance. Bank of America similarly reported strong earnings and capital ratios, increasing the likelihood of refinancing activity. Specific redemption events are already scheduled, with Goldman Sachs Bank USA set to redeem $2.65 billion of 5.414% fixed/floating notes and $850 million of floaters at par on 21 May 2026.
Market indicators suggest the current environment is sensitive to these dynamics. The 10-year Treasury yield sits near 4.5%, representing the 96th percentile of its trailing 12-month range. The 10-year minus 2-year yield curve spread is currently 0.50%, below its 12-month average of 0.6%. Analysts advise monitoring these metrics, as a sustained move in the 10-year yield below 4% would sharply raise the probability of issuers calling their high-coupon paper, thereby compressing the fund’s yield.
For investors concerned about upside caps and call risk, the analysis suggests the Invesco Variable Rate Preferred ETF as an alternative. Unlike PFF’s fixed coupon structure, the variable rate fund’s coupons reset higher when rates rise, reducing the issuer’s incentive to call the securities. While this option may offer lower yield in falling rate environments, it mitigates the risk of forced reinvestment at lower rates that characterises the iShares fund.
