PFF vs. VMBS: What’s The Difference?

The iShares Preferred and Income Securities ETF (PFF) and the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) are both among the Top 100 ETFs. PFF is a iShares Preferred Stock fund and VMBS is a Vanguard Intermediate Government fund. So, what’s the difference between PFF and VMBS? And which fund is better?

The expense ratio of PFF is 0.41 percentage points higher than VMBS’s (0.46% vs. 0.05%). PFF also has a high exposure to the utilities sector while VMBS is mostly comprised of AAA bonds. Overall, PFF has provided higher returns than VMBS over the past 10 years.

In this article, we’ll compare PFF vs. VMBS. We’ll look at industry exposure and fund composition, as well as at their risk metrics and performance. Moreover, I’ll also discuss PFF’s and VMBS’s holdings, portfolio growth, and annual returns and examine how these affect their overall returns.

Summary

PFF VMBS
Name iShares Preferred and Income Securities ETF Vanguard Mortgage-Backed Securities Index Fund ETF Shares
Category Preferred Stock Intermediate Government
Issuer iShares Vanguard
AUM 19.8B 16.61B
Avg. Return 6.90% 2.89%
Div. Yield 4.47% 1.23%
Expense Ratio 0.46% 0.05%

The iShares Preferred and Income Securities ETF (PFF) is a Preferred Stock fund that is issued by iShares. It currently has 19.8B total assets under management and has yielded an average annual return of 6.90% over the past 10 years. The fund has a dividend yield of 4.47% with an expense ratio of 0.46%.

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) is a Intermediate Government fund that is issued by Vanguard. It currently has 16.61B total assets under management and has yielded an average annual return of 2.89% over the past 10 years. The fund has a dividend yield of 1.23% with an expense ratio of 0.05%.

PFF’s dividend yield is 3.24% higher than that of VMBS (4.47% vs. 1.23%). Also, PFF yielded on average 4.00% more per year over the past decade (6.90% vs. 2.89%). The expense ratio of PFF is 0.41 percentage points higher than VMBS’s (0.46% vs. 0.05%).

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Fund Composition

Holdings

PFF - Holdings

PFF Holdings Weight
Broadcom Inc Broadcom Inc 8 % Mandatory Convertible Preferred Stock Ser A 2.54%
BlackRock Cash Funds Treasury SL Agency 2.3%
Wells Fargo & Co 7 1/2 % Non Cum Perp Conv Pfd Shs -A- Series -L- 1.79%
Bank of America Corp 7 1/4 % Non-Cum Perp Conv Pfd Shs Series -L- 1.49%
ArcelorMittal S.A. 5.5% 1.36%
Danaher Corp PRF CONVERT 15/04/2022 USD – Ser A 1.35%
Danaher Corp 5% PRF PERPETUAL USD 1000 – Ser B 1.14%
NextEra Energy Inc Unit 1.12%
Citigroup Capital XIII Floating Rate Trust Pfd Secs Registered 2010-30.10.4 1.08%
Avantor Inc Ser A 0.99%

PFF’s Top Holdings are Broadcom Inc Broadcom Inc 8 % Mandatory Convertible Preferred Stock Ser A, BlackRock Cash Funds Treasury SL Agency, Wells Fargo & Co 7 1/2 % Non Cum Perp Conv Pfd Shs -A- Series -L-, Bank of America Corp 7 1/4 % Non-Cum Perp Conv Pfd Shs Series -L-, and ArcelorMittal S.A. 5.5% at 2.54%, 2.3%, 1.79%, 1.49%, and 1.36%.

Danaher Corp PRF CONVERT 15/04/2022 USD – Ser A (1.35%), Danaher Corp 5% PRF PERPETUAL USD 1000 – Ser B (1.14%), and NextEra Energy Inc Unit (1.12%) have a slightly smaller but still significant weight. Citigroup Capital XIII Floating Rate Trust Pfd Secs Registered 2010-30.10.4 and Avantor Inc Ser A are also represented in the PFF’s holdings at 1.08% and 0.99%.

VMBS - Holdings

VMBS Bond Sectors Weight
AAA 100.01%
Below B 0.0%
B 0.0%
BB 0.0%
BBB 0.0%
A 0.0%
AA 0.0%
US Government 0.0%
Others -0.01%

VMBS’s Top Bond Sectors are ratings of AAA, Below B, B, BB, and BBB at 100.01%, 0.0%, 0.0%, 0.0%, and 0.0%. The fund is less weighted towards A (0.0%), AA (0.0%), and US Government (0.0%) rated bonds.

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Risk Analysis

PFF VMBS
Mean Return 0.52 0.21
R-squared 9.39 65.78
Std. Deviation 7.87 2.02
Alpha 3.45 0.37
Beta 0.81 0.54
Sharpe Ratio 0.72 0.94
Treynor Ratio 6.79 3.47

The iShares Preferred and Income Securities ETF (PFF) has a Treynor Ratio of 6.79 with a Alpha of 3.45 and a Standard Deviation of 7.87. Its Beta is 0.81 while PFF’s Mean Return is 0.52. Furthermore, the fund has a R-squared of 9.39 and a Sharpe Ratio of 0.72.

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) has a Alpha of 0.37 with a Treynor Ratio of 3.47 and a Standard Deviation of 2.02. Its Sharpe Ratio is 0.94 while VMBS’s Beta is 0.54. Furthermore, the fund has a R-squared of 65.78 and a Mean Return of 0.21.

PFF’s Mean Return is 0.31 points higher than that of VMBS and its R-squared is 56.39 points lower. With a Standard Deviation of 7.87, PFF is slightly more volatile than VMBS. The Alpha and Beta of PFF are 3.08 points higher and 0.27 points higher than VMBS’s Alpha and Beta.

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Performance

Annual Returns

PFF vs. VMBS - Annual Returns

Year PFF VMBS
2020 7.94% 3.77%
2019 15.62% 6.17%
2018 -4.77% 0.87%
2017 8.33% 2.37%
2016 1.26% 1.43%
2015 4.62% 1.43%
2014 13.45% 5.81%
2013 -0.59% -1.28%
2012 18.25% 2.47%
2011 -2.2% 5.89%
2010 13.96% 5.24%

PFF had its best year in 2012 with an annual return of 18.25%. PFF’s worst year over the past decade yielded -4.77% and occurred in 2018. In most years the iShares Preferred and Income Securities ETF provided moderate returns such as in 2015, 2020, and 2017 where annual returns amounted to 4.62%, 7.94%, and 8.33% respectively.

The year 2019 was the strongest year for VMBS, returning 6.17% on an annual basis. The poorest year for VMBS in the last ten years was 2013, with a yield of -1.28%. Most years the Vanguard Mortgage-Backed Securities Index Fund ETF Shares has given investors modest returns, such as in 2017, 2012, and 2020, when gains were 2.37%, 2.47%, and 3.77% respectively.

Portfolio Growth

PFF vs. VMBS - Portfolio Growth

Fund Initial Balance Final Balance CAGR
PFF $10,000 $17,789 6.90%
VMBS $10,000 $13,265 2.89%

A $10,000 investment in PFF would have resulted in a final balance of $17,789. This is a profit of $7,789 over 10 years and amounts to a compound annual growth rate (CAGR) of 6.90%.

With a $10,000 investment in VMBS, the end total would have been $13,265. This equates to a $3,265 profit over 10 years and a compound annual growth rate (CAGR) of 2.89%.

PFF’s CAGR is 4.00 percentage points higher than that of VMBS and as a result, would have yielded $4,524 more on a $10,000 investment. Thus, PFF outperformed VMBS by 4.00% annually.


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