Preferred stocks - a high-yield asset that's typically referred to as a stock-bond "hybrid" because it has characteristics of each - are treading water this year after a strong showing in 2017.
But that's OK. Preferred stocks typically aren't bought for upside potential - it's about stability and income. "Straight preferred stock funds without other equities are fixed-income securities with a low correlation to the stock market," says Jay Hatfield, founder and chief executive officer of Infrastructure Capital Advisors (InfraCap) and co-portfolio manager of the Virtus InfraCap U.S. Preferred Stock ETF (PFFA). He adds that they can reduce portfolio volatility "and be used to rebalance during down markets."
Now might be the right time, considering the rising-interest-rate atmosphere. While preferreds "have long duration and are sensitive to movements in long-term interest rates," Hatfield and his team expect the 30-year Treasury to stay in the 3%-3.5% area, which means preferred stocks "will be attractive with yields of over 6%."
Eric Chadwick, president of preferred-stock specialist Flaherty & Crumrine, also downplays any interest-rate risk. "Preferreds tend to perform well relative to other fixed income in periods of rising interest rates, although the path may be bumpy along the way," Chadwick says, adding that preferreds tend to price in interest rate hikes early.
Here's a look at 10 funds that can help you jump on this income opportunity in preferred stocks. Chadwick and Hatfield both suggest investing in a broad, actively managed preferred-stock funds, though investors looking for inexpensive options have their pick of a couple cheap exchange-traded funds, too. Let's dig in:
iShares US Preferred Stock ETF
Market value: $16.8 billion
SEC yield: 5.7%
Expenses: 0.47%, or $47 annually for every $10,000 invested
The iShares US Preferred Stock ETF (PFF, $37.97) is one of the most basic options for investors looking to get into preferred shares. It's the largest exchange-traded fund by assets under management, it has high volume and its expenses are reasonable. Plus, at roughly 300 holdings, it's plenty diversified.
The PFF is very typical in that the largest chunk of preferreds are in bank, insurance and other financial stocks (66%) from the likes of Citigroup (C), Barclays (BCS) and Wells Fargo (WFC). Another 14% is invested in real estate investment trust (REIT) preferred stocks, and there's a smattering of energy, utility and other preferreds as well.
You're not getting anything complex or targeted with PFF, for better or worse. It's cheap, it's efficient and it's diversified.
*SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.
SEE ALSO: 10 Best ETFs to Buy for Beginners
- 14 Top-Flight International Dividend Stocks to Buy
- The 10 Best Closed-End Funds for 2018
- The 8 Best Income Funds for a Scared Market
Copyright 2018 The Kiplinger Washington Editors