Aside from the usual dividend stocks, high-yield bonds and real estate investment trusts, income-hungry investors can also turn to preferred stocks, which are hybrid securities that offer traits of both common stocks and bonds.
Brandon Rakszawski, vice president and director of product management at VanEck, says, “Preferred stocks typically fall ahead of common equity holders and behind senior debt holders in a company’s capital structure.” As a result of their hybrid profile, preferred stocks possess some unique traits.
These assets don’t usually have voting rights like common shares do, but they make up for it in other ways. Notably, preferred stocks often spit out much higher-yielding, consistent income that beats out regular dividend stocks and even corporate bonds.
“In some cases, if the company cannot pay the preferred dividends, that obligation accumulates, and the preferred shareholders will receive payouts before common shareholders,” says Chris Manske, founder and president of Manske Wealth Management.
[Sign up for stock news with our Invested newsletter.]
Like regular stocks, preferred stocks also possess the potential for share price appreciation, albeit to a more muted degree. “As such, preferred shares may be the right choice for investors seeking stability and yield but still wanting equity ownership,” says Rohan Reddy, director of research at Global X ETFs.
However, these securities also come with a unique set of risks to keep in mind.
“As hybrid securities, preferred stocks are subject to risks typical of fixed income, such as interest rate risk,” Rakszawski says. When interest rates rise, the share price of preferred stocks can fall like bond prices do. “In addition, preferred stocks may be subject to higher credit risk than senior debt holders because of their lower capital structure positioning,” he says.
On the flip side, preferred stocks remain exposed to market risk. “During the 2008 financial crisis, preferred shares behaved like common stock in terms of their propensity to plummet,” says Derek Horstmeyer, professor of finance at George Mason University. “While the S&P 500 fell 38% in 2008, preferred stock lost an average of 25%.”
The problem with picking individual preferred stocks is the amount of research required. “Individual preferred stocks can be complex, with different maturities, call provisions, conversion features and coupon features to consider,” Rakszawski says.
Manske agrees with Rakszawski, noting, “An ETF manager can have access to preferred stock offerings that retail investors do not, which means diversification from buying shares of a billion-dollar preferred ETF is going to be greater than if an investor tries to pick preferred stocks one-by-one.”
Investors interested in preferred stocks can use these seven exchange-traded funds, or ETFs, for exposure:
| Preferred stock ETF | Expense ratio |
| iShares Preferred and Income Securities ETF (ticker: PFF) | 0.46% |
| VanEck Preferred Securities ex Financials ETF (PFXF) | 0.41% |
| First Trust Preferred Securities and Income ETF (FPE) | 0.85% |
| Invesco Preferred ETF (PGX) | 0.5% |
| SPDR ICE Preferred Securities ETF (PSK) | 0.45% |
| Global X U.S. Preferred ETF (PFFD) | 0.23% |
| Global X SuperIncome Preferred ETF (SPFF) | 0.48% |
iShares Preferred and Income Securities ETF (PFF)
“Stocks come with market risk, and bonds come with credit and interest rate risk,” says Jordan Taylor, financial advisor at Core Planning. “Preferred stocks bridge both by taking a little of each, which can be a way to reduce asset-class-specific risks, add extra yield and create opportunities for diversification.” For a broad bet on this asset class, investors can buy PFF.
PFF currently holds 454 preferred stock issues, with 71.4% issued by financial sector companies. The ETF is passively managed, tracks the ICE Exchange-Listed Preferred & Hybrid Securities Index and has a 0.46% expense ratio. Currently, PFF pays a 30-day SEC yield of 6.7%. The ETF is one of the more popular options for preferred shares, sporting assets under management, or AUM, of about $12.7 billion.
VanEck Preferred Securities ex Financials ETF (PFXF)
The recent collapse of Silicon Valley Bank taught investors an important lesson about sector concentration. For those skittish about PFF’s high concentration in preferred stock from financial sector companies, PFXF offers a good alternative. This ETF tracks the ICE Exchange-Listed Fixed & Adjustable-Rate Non-Financial Preferred Securities Index, which only holds issues from non-financial companies.
“Many investors already have exposure to financials across their equity and fixed-income allocations, so PFXF allows investors to access preferred stocks in utilities and real estate, too,” Rakszawski says. “What’s more, non-financial preferred securities have historically offered a slight yield premium, lower duration and lower call risk.” PFXF charges a 0.41% expense ratio and has a 30-day SEC yield of 7.6%.
[READ: 8 Best Real Estate Stocks to Buy.]
First Trust Preferred Securities and Income ETF (FPE)
For investors seeking an actively managed solution, FPE could be a good alternative to PFXF or PFF. Unlike the two previous ETFs, FPE does not follow an index. The ETF is free to target not only preferred stocks, but also high-yield corporate bonds and convertible securities as its management team deems fit. Like most actively managed ETFs, FPE is pricey, with a higher expense ratio of 0.85%.
In terms of holdings, FPE boasts high allocations to preferred stocks from financial sector companies, with 40.6% of its issuers being banks, 19.9% being insurance companies, 7.3% being capital markets companies and 4.4% being financial services companies. Only about 10% of the ETF’s holdings are ranked as BBB+ and above, meaning that the majority are below investment grade.
Invesco Preferred ETF (PGX)
“A steady preferred stock ETF that checks all the boxes is PGX — it’s not the biggest nor the most profitable, nor is it the most volatile nor the most expensive,” Manske says. “But in every category that matters, it’s impressively plain vanilla, which is just what you want from an ETF like this.” PGX tracks the ICE BofAML Core Plus Fixed Rate Preferred Securities Index.
However, there are some nuances to note. PGX does not actually hold all of the preferred stocks tracked by the index; rather, the ETF uses a sampling methodology to approximate it with 265 current holdings. For investors looking for enhanced exposure, PGX also offers an options chain. In terms of metrics, PGX charges a 0.5% expense ratio and has a 30-day SEC yield of 6.3%.
SPDR ICE Preferred Securities ETF (PSK)
Investors looking for a preferred stock ETF with a more stringent set of criteria can use PSK, which tracks the ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index. To qualify for inclusion, a preferred stock must be non-convertible, U.S. dollar denominated, have a par value of $25, be listed on the NYSE or Nasdaq exchanges, and be rated investment grade by either Moody’s or Standard & Poor’s.
Other criteria include having sufficient trading volume of at least 250,000 units in the preceding six months and at least 18 months remaining to maturity. Like most of the ETFs on this list, PSK features a heavy 71.8% allocation to financial sector preferred securities, with utilities coming in second at 13.2%. The ETF charges a 0.45% expense ratio and pays a 30-day SEC yield of 6.1%.
Global X U.S. Preferred ETF (PFFD)
“With a preferred stock ETF, you can offload the due diligence of picking individual preferred shares to an asset manager for relatively a low cost,” Taylor says. “Instead, you can focus your research on picking the right asset manager and ensuring their philosophy, investment style and holdings are what you want.” A great pick here with a lower-than-average expense ratio is PFFD, which charges 0.23%.
PFFD is passively managed, tracking the ICE BofA Diversified Core U.S. Preferred Securities Index. Right now, the ETF holds 238 preferred issues from U.S. companies, again with a financial sector focus. In terms of income, PFFD currently pays a 30-day SEC yield of 6.7% and has made monthly distributions for six consecutive years. The ETF currently has just over $2.2 billion in AUM.
Global X SuperIncome Preferred ETF (SPFF)
“A benefit of preferred stocks is that they receive a dividend, which is usually fixed, although some are floating. Either way, this helps to ensure owners receive steady, ongoing cash payments,” Reddy says. “Preferred stocks also tend to have a lower correlation with both common stock and fixed income, making them useful portfolio diversifiers as well.”
For yield-hungry investors, Global X offers SPFF, which holds a concentrated portfolio of the 50 highest-yielding preferred stocks in the U.S. by tracking the Global X U.S. High Yield Preferred Index. Currently, the ETF pays a 30-day SEC yield of 6.5% and has made monthly distributions for 11 consecutive years. SPFF charges a 0.48% expense ratio.
More from U.S. News
8 Companies That Could Issue the Next Stock Split
7 Clean Energy ETFs to Buy Now
8 Best Quantum Computing Stocks to Buy in 2023
7 Preferred Stock ETFs to Buy Now originally appeared on usnews.com
Update 09/29/23: This story was previously published at an earlier date and has been updated with new information.
