Should You Invest in Preferred Stock ETFs?
Learn more about preferred stock ETFs and which are the best
Preferred stock ETFs can be a smart addition to a portfolio, especially for investors wanting an income from dividends. Learn the pros and cons of these funds that invest in preferred stocks and find out which ones are the best to buy now.
What Are Preferred Stock ETFs?
Preferred stock ETFs are exchange-traded funds that enable investors to buy a portfolio of preferred stocks. But what exactly are preferred stocks? Preferred stock can be considered a hybrid of common stock and bonds. The reason for this hybrid status is that preferred stocks are equity securities like common stocks but have income qualities like bonds.
Like bonds, preferred stocks are assigned a par value and they pay a stated rate of interest. The price of the preferred stock tends to fluctuate with the rise and fall of interest rates, similar to bonds (prices move in the opposite direction of interest rates).
Preferred stocks are also unique in that they receive priority status if there were a bankruptcy and liquidation proceeding with the corporate issuer. For example, if a particular company needed to liquidate assets in a bankruptcy proceeding, preferred stockholders would receive money (if any remains) before the common stockholders (but after the creditors and bondholders). This explains the preferred moniker.
The Pros and Cons of Buying Preferred Stock ETFs
Before buying preferred stock ETFs, investors are wise to learn the pros and cons of these unique investment securities.
Preference in bankruptcy
Less market risk than common stock
Interest rate risk
No voting rights
Here are the pros of buying preferred stock ETFs:
- Higher dividends: Compared to common stock, preferred stock will generally pay greater dividends.
- Preference in bankruptcy: Preferred stocks are ahead of common stocks (but behind bonds) in order of liquidation if there is a bankruptcy proceeding.
- Less market risk than common stock: Dividend payments are fixed and price fluctuations are not as pronounced, compared to common stock, making preferred stocks less risky.
Here are the cons of investing in preferred stock ETFs:
- Interest rate risk: Since preferred stock is interest rate sensitive like bonds, their generally not ideal investments to hold when interest rates are rising. This is because the price typically falls when interest rates are going up. However, common stock can gain price in a rising interest rate environment.
- No voting rights: Unlike common stock, shareholders do not receive voting rights with preferred stock.
- Minimal growth: The tradeoff for low market risk and fixed dividend rates is that preferred stock produces little to no price gains for investors.
Best Preferred Stock ETFs to Buy in 2019
The best-preferred stock ETFs will be true to their stated objective, meaning that the majority of holdings will consist of preferred stocks (or accurately track an index of preferred stocks). Since most preferred stock ETFs track the same or similar benchmark indexes, low expenses are a primary criterion to look for when looking for the best performance.
Investors are also wise to look for high assets under management and a long track record of performance. If you’re looking for yield, a high current yield (SEC 30-Day Yield) is a must.
With those primary criteria in mind, here are some of the best-preferred stock ETFs to buy in 2019:
- SPDR Wells Fargo Preferred Stock ETF (PSK): Considering all of the qualities that make the best-preferred stock ETFs, PSK may be the best overall. With a solid current yield of 5.74% and a low expense ratio of 0.45%, PSK offers investors a good combination of income and low cost that preferred stock investors seek. PSK tracks the Wells Fargo Hybrid and Preferred Securities Aggregate Index.
- Invesco Preferred ETF (PGX): With assets under management near $5 billion, PGX is the largest preferred stock ETF on the market. Higher assets can translate to greater price stability through greater liquidity. The current yield for PGX is 5.35% and expenses are 0.52%. PGX tracks the ICE BofAML Core Plus Fixed Rate Preferred Securities Index.
- Global X Superincome Preferred ETF (SPFF): If you’re looking for high yield, SPFF may be the fund for you. Its current yield of 6.01% is higher than most preferred stock ETFs and the expense ratio of 0.58% is attractive. However, assets are on the low side at just $192 million.
The Bottom Line
Preferred stock ETFs can be used wisely, especially for investors who are looking for a way to diversify a portfolio designed for income. The combination of high dividends and lower market risk compared to common stock can be attractive for conservative investors. However, long-term investors looking for growth may want to look elsewhere for the best ETFs for their portfolio.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.