The stock market’s recent rise has me watching an equity fund that invests in preferred stocks. The S&P U.S. Preferred Stock Index Fund (PFF) seeks investment results that track the S&P Preferred Stock Index. That index measures the performance of selected groups of preferred stocks that individually have a market capitalization of more than $100,000. I want to tell you about the fund, in case you decide to consider it as a potential investment in the coming weeks and months.

Preferred shares are unique investment instruments. They give investors a fixed dividend from a company's earnings and those payments are made before any dividends are available to common shareholders. As a result, preferred shares are senior to common shares in priority for receiving dividend payments. By investing in a preferred stock fund, you gain the benefit of any capital appreciation that occurs when its share price rises and you also receive additional income from dividend payments, thereby boosting your total return on the investment. A big advantage of PFF is that it gives you two ways to profit.

As with many dividend-paying funds, PFF is heavily concentrated on the financial sector. In fact, as of Sept. 27, 86.31% of the fund’s holdings were invested in financial stocks. The next two highest holdings, also on that date, were well below that level and featured consumer discretionary, 4.99%, and consumer staples, 2.07%. The companies that composed the five largest holdings in the fund on that date were: Ford Capital Trust, 3.82%; Barclays Bank PLC, 3.67%; Wells Fargo & Co., 3.14%; Bank of America Corp., 2.62%; and JPMorgan Chase Capital, 2.48%. So, keep in mind that the fund is heavily dependent on financial stocks. If you think that sector is ripe to rise, PFF may entice you. If you expect financial stocks to take a further beating, you may prefer to avoid the fund for now.

As the chart below shows, PFF has been on a recent uptrend. It is not one of my current recommendations but if the market pulls back and gives us a chance to jump back into equities at a reduced price, PFF is one of the funds that I am watching closely.

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