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Guide to Preferred Stock ETF Investing

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With global growth issues flexing muscles and corporate earnings having chances of falling flat, risk-on sentiments are finding it tough to sail smooth this year. Safe harbors like Treasury bonds are in demand, resulting in a subdued rise in long-term yields, while the rise in rates is more pronounced in the short-term bonds due to a super-hawkish Fed.

The Fed enacted a 75-bp rate hike late last week. The rise in rate was the biggest since 1994. The federal funds rate is projected to be 3.4% for 2022 from 1.9% in March, 3.8% for 2023 from 2.8% and 3.4% for 2024 from 2.8%. The obvious outcome is a slowdown in economic growth.

The Fed downgraded its forecast for 2022 median real GDP growth from 2.8% in March to 1.7% for 2022. It also lowered the growth rate expectations to 1.7% (from 2.2% in March) for 2023 and 1.9% (from 2% in March) for 2024. The unemployment rate is projected to rise from 3.5% to 3.7% for 2022, 3.5% to 3.9% for 2023 and from 3.6% to 4.1% for 2024.

Needless to say, this is a difficult situation for income investors that forced many to try out almost every high-yielding investing option. But higher yields sometimes come with higher risks. So, it is better to bet on investing areas that are better positioned from the return perspective and offer a solid yield. One such option is preferred ETF.

What is a Preferred Stock?

A preferred stock is a hybrid security that has characteristics of both debt and equity. These do not have voting rights but a higher claim on assets than common stock. This means that dividends to preferred stockholders must be paid before any dividend is paid to the common stockholders. And in the event of bankruptcy, preferred stockholders’ claims are senior to common stockholders’ claims, but junior to the claims of bondholders.

The preferred stocks pay stockholders a fixed, agreed-upon dividend at regular intervals, like bonds. Most preferred dividends have the same tax advantage that the common stock dividends currently have. However, while the companies have the obligation to pay interest on the bonds that they issue, the dividend on a preferred stock can be suspended or deferred by the vote of the board.

Preferred stocks generally have a low correlation with other income-generating segments of the market like REITs, MLPs, corporate bonds and TIPs. Below we highlight a few such options that are rising and offer more than 5% yield.

iShares Preferred & Income Securities ETF (PFF)

The iShares Preferred and Income Securities ETF seeks to track the investment results of an index composed of U.S. dollar-denominated preferred and hybrid securities. Financial Institutions (63.48%) and Industrial (22.11%) are the top two sectors. The fund yields 4.80% annually.

First Trust Preferred Securities & Income ETF (FPE - Free Report)

The First Trust Preferred Securities and Income ETF is an actively managed ETF. The fund’s investment objective is to seek total return and provide current income. Under normal market conditions, the fund invests at least 80% of its net assets in preferred securities and income-producing debt securities, including corporate bonds, high yield securities and convertible securities. The fund charges 85 bps in fees.

Fixed-to-Floating Rate and Fixed-to-Variable Rate Securities take about 74.74% of the fund, followed by Fixed Rate Securities (21.65%). It yields about 4.51% annually.

Invesco Preferred ETF (PGX - Free Report)

The ICE BofAML Core Plus Fixed Rate Preferred Securities Index tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the domestic market. The fund charges 51 bps in fees and yields 5.79% annually. Financials (66.84%), Utilities (10.71%) and real estate (8.51%) take the top three spots in the fund.

Global X U.S. Preferred ETF (PFFD - Free Report)

The underlying ICE BofAML Diversified Core US Preferred Securities Index seeks to track the broad-based performance of the U.S. preferred securities market. Financials (65.3%), Utilities PFFD charges 23 bps in fees and yields 6.39% annually.


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