When it comes to owning a piece of a company, most people are familiar with investing in common equities, or stocks. However, there’s a lesser-known alternative: preferred stock, a type of hybrid security with both equity and fixed-income characteristics.
Preferred stocks still represent ownership in the company and are categorized under equity on the balance sheet, but they come with some key distinctions.
“Preferred stocks typically fall ahead of common equity holders and behind senior debt holders in a company’s capital structure,” says Brandon Rakszawski, vice president and director of product management at VanEck.
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In addition, preferred stocks prioritize dividends. While preferred shareholders typically give up voting rights and forgo the significant capital appreciation potential of common stocks, they are compensated with higher, steadier yields.
Preferred stocks are typically issued at a fixed par value, pay scheduled dividends and often come with credit ratings similar to bonds. Despite these advantages, they can be harder for retail investors to buy because most preferred shares trade with lower liquidity than common stocks.
Preferred stocks also come with various features that retail investors may be unfamiliar with. “Individual preferred stocks can be complex, with different maturities, call provisions, conversion features and coupon features to consider,” Rakszawski says.
For example, cumulative preferred stocks allow deferred dividend payments to accumulate, ensuring preferred shareholders are paid in full before any common stock dividends are distributed.
Convertible preferred stocks can be exchanged for common shares at a predetermined rate, subject to specific clauses. Some are even callable, meaning the issuer reserves the right to buy them back at par value on a specified date.
Dividend structures can also vary. Some preferred stocks have fixed coupons, keeping the dividend amount steady, while others have variable rates that adjust based on a benchmark interest rate.
Finally, investors interested in preferred shares need to understand the various risks these securities possess. “As hybrid securities, preferred stocks are subject to risks typical of fixed income, such as interest rate risk,” Rakszawski says. “In addition, preferred stocks may be subject to higher credit risk than senior debt holders because of their lower capital structure positioning.”
For investors who find this overwhelming, preferred stock exchange-traded funds (ETFs) provide a simpler solution. These funds pool a diversified basket of preferred stocks, offering an easy and liquid way to access this market while leaving selection and portfolio management to professionals.
Here are seven of the best ETFs to buy for preferred stock exposure today:
| ETF | Expense ratio | 30-day SEC Yield |
| iShares Preferred and Income Securities ETF (ticker: PFF) | 0.46% | 5.8% |
| First Trust Preferred Securities and Income ETF (FPE) | 0.84% | 5.6% |
| Global X U.S. Preferred ETF (PFFD) | 0.23% | 6.4% |
| Global X SuperIncome Preferred ETF (SPFF) | 0.48% | 6.3% |
| VanEck Preferred Securities ex Financials ETF (PFXF) | 0.40% | 6.6% |
| Invesco Financial Preferred ETF (PGF) | 0.54% | 5.8% |
| Invesco Preferred ETF (PGX) | 0.50% | 6.0% |
iShares Preferred and Income Securities ETF (PFF)
With $14.6 billion in assets under management (AUM), PFF is one of the most popular preferred stock ETFs. It currently tracks over 440 holdings represented by the ICE Exchange-Listed Preferred & Hybrid Securities Index. Currently, this ETF is delivering an above-average 5.8% 30-day SEC yield. It is less volatile than the broader market, with a three-year equity beta of 0.6, making it a lower-risk option for income generation.
However, PFF isn’t a low-risk investment. “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 Costello College of Business. “While the S&P 500 fell 38% in 2008, preferred stock lost an average of 25%.” In 2022, this ETF suffered an 18.4% loss when rates rose.
First Trust Preferred Securities and Income ETF (FPE)
“An ETF manager can have access to preferred stock offerings that retail investors do not, which means diversification from buying shares of a preferred ETF is going to be greater than if an investor tries to pick preferred stocks one-by-one,” says Chris Manske, founder and president of Manske Wealth Management. For example, FPE holds over 230 preferred stock issues that pay a 5.6% 30-day SEC yield.
This ETF is actively managed, meaning that unlike PFF it does not replicate a benchmark index. PFF has a broad mandate that allows it to not only hold preferred stocks, but also high-yield bonds and even convertible bonds. As a result, PFF holds a decent allocation to below-investment-grade securities that pay higher yields but have greater risk. The ETF charges a 0.84% expense ratio.
Global X U.S. Preferred ETF (PFFD)
“Preferred shares may be the right choice for investors seeking stability and yield but still wanting equity ownership,” says Rohan Reddy, head of international business development and corporate strategy at Global X ETFs. “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 cash payments.”
Global X’s flagship preferred stock ETF is PFFD. This ETF currently has $2.3 billion in AUM and tracks over 200 holdings represented by the ICE BofA Diversified Core U.S. Preferred Securities Index. It is currently paying a 6.4% 30-day SEC yield and has paid monthly distributions for seven years in a row. A key benefit of this ETF is its low expense ratio of just 0.23%, which is significantly cheaper than most.
Global X SuperIncome Preferred ETF (SPFF)
As hybrid securities, preferred stocks come with credit ratings similar to bonds, thanks to their fixed-income characteristics like steady dividend payments. And, as with bonds, achieving higher yields often means owning preferred stocks with greater credit risk. The ETF to buy for this strategy is SPFF, which holds 50 preferred stocks represented by the Global X U.S. High Yield Preferred Index.
SPFF currently boasts a 10.9% distribution rate. This figure represents the annual yield an investor would hypothetically receive if the most recent distribution remained consistent moving forward at the current net asset value. This is calculated by multiplying the most recent monthly distribution by 12 and dividing by the fund’s NAV. However, SPFF is pricier than PFFD, with a 0.48% expense ratio.
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VanEck Preferred Securities ex Financials ETF (PFXF)
A feature of most preferred stock ETFs is their high allocation to banks. This is because regulators require banks to maintain adequate “Tier 1 capital” as a risk mitigation measure to support their liabilities. Preferred stock is more attractive for banks than issuing common stock, which would dilute existing shareholders. Thus, banks tend to issue preferred stock to buoy their capital ratios.
“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.” This ETF currently pays a 6.6% 30-day SEC yield and charges a 0.4% expense ratio.
Invesco Financial Preferred ETF (PGF)
Investors who don’t mind high financial sector exposure can buy PGF. “PGF provides attractive relative value considering the 50-plus-basis-point yield it provides over broad investment-grade corporate bonds, as well as the approximately 12% discount the underlying preferred are trading to par,” says Jason Bloom, head of fixed income and alternatives ETF product strategy at Invesco.
For a 0.54% expense ratio, PGF tracks the ICE Exchange-Listed Fixed Rate Financial Preferred Securities Index. Sixty-five percent of PGF’s holdings are rated “BBB” by Standard & Poor’s, meaning they are investment-grade. The ETF currently pays a 5.8% 30-day SEC yield. “Additionally, investors may enjoy higher after-tax yields given that PGF’s holdings are all qualified-dividend-income-eligible,” Bloom explains.
Invesco Preferred ETF (PGX)
For a broader approach to preferred stocks, Invesco also offers PGX. “PGX focuses on the fixed-rate 25-par preferred market, providing investors with a 50-basis-points-plus yield pickup over broad investment-grade corporate bonds while still investing in mostly investment-grade securities,” Bloom explains. Financial companies make up 71% of PGX’s portfolio, followed by utilities and real estate.
By tracking the ICE BofAML Core Plus Fixed Rate Preferred Securities Index, PGX has greater diversification, with a total of 263 holdings. Investors can currently earn a 6% 30-day SEC yield while paying a 0.5% expense ratio. “There is also a prospect of a narrowing discount in the underlying, as the average portfolio of preferreds trade at around a 13% discount to par,” Bloom explains.
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7 Best Preferred Stock ETFs to Buy Now originally appeared on usnews.com
Update 01/09/25: This story was previously published at an earlier date and has been updated with new information.
