The allure of dividends makes the idea of investing in the preferred stock of a company very appealing. In recent weeks investors have witnessed Warren Buffett's $3 billion investment into General Electric (NYSE:GE) and more recently the government's investment into large U.S. banks like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) with consideration in both deals being the receipt of dividend paying preferred stock.

Although corporations are typically the largest buyers of preferred stock, individual investors also have an opportunity to participate through the use of Preferred Stock ETFs. In this article we'll examine some of the top preferred stock ETFs to see why they have fared so poorly as of late. (Looking for more information on Buffett? Then check out Warren Buffett: How He Does It.)

ETFs Yield Year to Date* Size
iShares S&P U.S. Preferred Stock Index
(AMEX:PFF)
11.11% -27.69% $306M
PowerShares Financial Preferred (AMEX:PGF) 11.79% -27.36% $273M
PowerShares Preferred Portfolio
(AMEX:PGX)
N/A *Inception 01-31-08 $128M
SPDRS S&P 500
(AMEX:SPY)
2.38% -37.82% $91,898M
YTD Through October 15, 2008

Preferred Stock
Preferred stock holders give up their voting rights for the opportunity to receive a steady stream of dividend payments. In Buffett's GE deal, Berkshire Hathaway is entitled to receive a 10% dividend pay for its $3 billion investment. Institutions tend to hold preferred stock because of their ability to deduct 70% of the dividends earned on the investment.

Anemic Returns
The Preferred Stock ETFs mentioned are not the place to look if your searching for an investment vehicle that is non-correlated to a broad market index like the S&P 500. Each of the Preferred Stock ETFs mentioned has fallen along with the S&P 500 index, but the high yield dividend of PFF and PGX can offer a level of protection to investors.

Heavy on Financials
All of the Preferred Stock ETFs mentioned are heavily concentrated in many financials that are at the beginning stages of either seeking additional capital or receiving government assistance in order to navigate through the current financial crisis. The PowerShares Financial Preferred Portfolio ETFs top holdings include Bank of America, Merrill Lynch (NYSE:MER) and Credit Suisse (NYSE:CS). Wells Fargo (NYSE:WFC), Citigroup and Freeport-McMoran (NYSE:FCX) are among the leaders in the iShares S&P U.S. Preferred Stock Index Fund ETF. Among the top holdings of the PowerShares Preferred Portfolio ETF include Merrill Lynch and ING Groep (NYSE:ING).

Final Thoughts
The Preferred Stock ETFs overexposure to the financial services industry makes them a particularly risky investment at the moment, but for an investor with a long investment time horizon and a preference for dividend paying investment vehicles the preferred ETFs are an option to consider.

To learn more, see Five Ways To Find A Winning ETF.

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