The current low interest rate environment has led many investors to specialized areas of the market in search of income and appreciation. Preferred stock exchange traded funds are one of those, but the sector has unique risks investors need to consider.
“Preferred shares not only offer substantial yields (often exceeding 6%) but also the opportunity for capital appreciation. Investors have the option of investing in individual companies’ preferred stock or buying preferred stock ETFs which provide a very convenient way to invest in a basket of diversified companies at a low cost,” Neena Mishra wrote for Zacks.
It is worthy to note that any investment with a decent yield will entail some risk with the reward.
Preferred stocks have no voting rights for shareholders, but they are entitled to higher payouts than those of common stock. Plus, dividend payouts to preferred shareholders is doled out first, so in the chance of bankruptcy, common stock holders may be left out. [What is an ETF? - Preferred Stocks]
Preferred shares are sensitive to interest rates, so as rates rise, these shares lose value. Not all preferred shares are rated or rated high, and some do carry credit risk. Most preferred shares are focused in the financial sector, which has been a volatile sector over the past few years. [Why Preferred Stock ETFs are Hot]
Some of the recent regulatory changes are not favorable to preferred shares issued from financial institutions and this could also add to the level of volatility. [Preferred Stock ETFs with High Yields]
The iShares S&P US Preferred Shares Index (PFF) is the most popular ETF in this space,with $9.9 billion in assets. It yields 6.07%. For those investors seeking exposure to this space without the risk of the U.S. financial industry, the Global X Canada PreferredETF (CNPF) is an option, but the yield is at 3.65%. Market Vectors Preferred Securities ex-Financials ETF (PFXF) yields 6.78%, and omits the financial sector completely.
iShares S&P US Preferred Shares Index
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.