Preferred stocks are usually not first, second or even third when investors think about what they want to put in their portfolio. But if you’re an income hunter and you don’t already have those stocks on your radar, you may want to give your options – and specifically, preferred stock ETFs – a look.
Preferred stocks are often referred to as “hybrid” stock bonds because they contain elements of common stock (the type of stock you usually invest in) and bonds. For example, like common stock, preferences represent ownership in a company, and are usually traded on exchanges. However, like bonds, preferred stock usually does not include suffrage.
However, the main feature of preferred stocks is dividends. Preferred stock dividends are closer to bond coupon payments in nature, as they are usually set at a fixed amount. These dividends are also high, often in the range of 5% -7%.
But preferred stocks also tend to act like bonds because they trade around par value. So, while they are a fixed source of income, they will not be able to generate higher returns, like common stock, as the company grows.
He is also not without risk.
“Because preferred securities have a long maturity, or no maturity, they tend to have a high interest rate risk, or the risk of the price going down when yields rise,” said Charles Schwab, and the popular preferred stock index is dead. 13% to date in 2022. “Because, preferred should always be considered a long-term investment since fluctuating interest rates can have an outsized effect on preferred security prices.”
While you can buy individual option stocks easily, exchange-traded funds (ETFs) allow you to reduce risk by investing in a basket of options. That helps prevent the disaster of your favorite stocks from ruining your portfolio.
With that in mind, there are three preferred stock ETFs to buy.
Data dated 26 May. SEC results reflect interest received for the most recent 30 -day period after deducting funding costs. SEC yields are the standard measure for preferred stock funds.
iShares Preferred and Income Securities ETF
- Assets under management: $ 15.8 billion
- SEC Results: 4.7%
- Cost: 0.46%, or $ 46 per year with an investment of $ 10,000
At iShares Preferred and Income Securities ETF (PFF, $ 34.25) is the largest liquid option stock ETF on the market. In assets under management (AUM) is $ 15.8 billion, approximately 2.5 times the size of its second largest competitor, First Trust Preferred Securities & Income ETF (FPE). It is also cheaper than FPE by 39 basis points (the basis point is one hundred percentage points).
PFF is direct, and many (though not all) competitors are built in the same way.
ETFs invest in almost 500 different preferred stocks, almost all from U.S. companies. A large portion of PFF’s choice (over 60%) comes from financial sector companies such as Wells Fargo (WFC) and Bank of America (BAC). Another 22% from the industrial sector, and 14% from utilities. The small remainder is dumped into cash bonds and agencies.
iShares Preferred and Income Securities ETFs yield less than 5% currently, but are still better than many sources of yields in the stock and bond markets.
Learn more about PFF on the iShares provider site.
VanEck Vectors Preferred Securities ex Financials ETF
- Assets under management: $ 984.9 million
- SEC Results: 5.7%
- Cost: 0.40%
At VanEck Vectors Preferred Securities ex Financials ETF (PFXF, $ 19.19) is different from most other preferred stock ETFs. You just have to look at the name to see how.
PFXF is one of the few “ex-financials” ETFs that emerged in the years after the bear market and the 2007-09 financial crisis. While stocks generally fell, banks and other financial sector stocks were at the center of the crisis. Confidence is eroded, so ETF providers know they can attract assets by offering products that the sector ignores.
VanEck Vectors Preferred Securities ex Financials ETF, introduced in 2012, instead of having healthy support from electric utilities (33%), real estate investment trusts, or REITs (15%) and telecommunications services (10%) is preferred, as well as exposure to dozens other industries, such as medical equipment, semiconductors and miscellaneous stores.
The financial nature of PFXF is not as important as it used to be. Banks are now better capitalized and regulated than they were in 2007, so the risk of another collapse is not very visible. That said, VanEck’s ETF and portfolio of almost 130% of stocks still remain to this day due to a combination of higher-than-average yields and one of the lowest costs in the preferred stock space.
Learn more about PFF on the VanEck provider site.
InfraCap REIT Preferred ETF
- Assets under management: $ 70.8 million
- SEC Results: 6.8%
- Cost: 0.45%
Virtus Investment Partners InfraCap REIT Preferred ETF (PFFR, $ 19.83) is, like PFXF, among the few preferred ETF stocks that come with a twist. Just like PFXF, the twist appears in the name.
PFFR invests in a group of about 100 specialty options in the real estate space. Some of the likes come from traditional REITs such as data center operator Digital Realty (DLR) and office-and-retail property owner Vornado Realty Trust (VNO). Others come from mortgage REITs (mREITs) such as Annaly Capital Management (NLY) that own “paper” – mortgages and mortgage -backed securities – rather than physical real estate.
Why is REIT preferred?
InfraCap said “these securities are also typically less affected by generally predictable income streams than those issued by banks and insurance companies.”
Though it’s an interesting proposition, just understand the potential risks that can be posed when laying all the eggs in the sector sellers – especially if America is experiencing another real estate crisis like the housing bubble that recently burst. Even just in a near-bear market like the downturn we experienced in 2022, the performance of other REITs is more traditional by a few percentage points.
On the other hand, the InfraCap REIT Preferred ETF rewards new money with one of the best results among preferred stock funds.
Learn more about PFFR on the Virtus provider site.