Particularly for investors seeking a dividend income, preferred stock ETFs might be a wise addition to a portfolio. Learn the advantages and disadvantages of these funds that invest in preferred stocks and choose the best ones to buy right now.
Main points
- Preferred stock ETFs are a special kind of investment that combines the characteristics of stocks and bonds.
- Risk-averse investors may favor preferred stock ETFs over stocks due to their large dividends and decreased market risk.
- The growth or long-term returns from preferred stock ETFs are not frequently significant.
- Costs and returns will be key considerations when comparing preferred stock ETFs.
Preferred Stock ETFs: What Are They?
Exchange-traded funds called preferred stock ETFs allow investors to own a portfolio of preferred equities. But what are preferred stocks exactly? A combination of common stock and bonds is preferred stock. Preferred stocks have a hybrid status since they trade in equity, like regular stocks, but exhibit income characteristics more akin to bonds. Preferred stocks have a par value and pay an agreed-upon interest rate, just like bonds. With changes in interest rates, preferred stock prices typically fluctuate. A preferred stock's price travels the opposite way of interest rates, just like bonds do. Another distinctive feature of preferred stocks is that, in the event of a corporate issuer's insolvency and liquidation, they would be given priority status. For instance, if a corporation had to sell off all of its assets to comply with a court order, the preferred investors would be paid first (assuming any money was left over) (but after the creditors and bondholders). This explains why it is called "preferred." The Benefits and Drawbacks of Investing in Preferred Stock ETFs Before investing, you should educate yourself on the benefits and drawbacks of preferred stock ETFs. What we like:- increased dividends
- In bankruptcy, preference
- The market risk is lower than with common stock.
- Rate-Risk Exposure
- No right to vote
- little growth
Purchasing preferred stock ETFs has the following benefits:
Greater dividends: Preferred stock often pays greater dividends than common stock. Preferred stocks are prioritized in bankruptcy proceedings, coming before common stocks (but after bonds) in the order of liquidation. Less market risk than common stock: In contrast to common stock, dividend payments are fixed, and price swings are not as dramatic. Preferred stock's risk is reduced by both of these characteristics. Investing in preferred stock ETFs has the following drawbacks:- Interest rate risk: Preferred stocks are not the ideal assets to hold during an increase in interest rates because they are interest rate sensitive, just like bonds. This is due to the fact that prices decrease as interest rates rise. However, in a market with rising interest rates, common stock might appreciate in value.
- Shareholders of preferred stock do not have voting rights, in contrast to common stock.
- Low market risk and fixed dividend rates come at a cost of minimal growth, which results in little to no price appreciation for investors in preferred stocks.
Understanding and Purchasing Preferred Stock ETFs
There are a few aspects to pay attention to if you want to invest in preferred stock ETFs. The finest preferred stock ETFs will adhere to their stated goals, which means that the majority of their assets will be preferred equities (or they will closely track an index of preferred stocks). Low expenses become one of the key characteristics to look for when trying to get the greatest value for your money because the majority of preferred stock ETFs track the same or similar benchmark indices. Additionally, keep an eye out for an extensive track record of success and substantial assets under management. A high current yield, such as the SEC's 30-day yield, is essential if you're seeking a yield. Here are some recommended stock ETF alternatives for 2022 with those requirements in mind:- In terms of all the characteristics that define the best-preferred stock ETFs, SPDR ICE Preferred Securities ETF (PSK) might be the finest overall. The PSK gives preferred stock investors a superb combination of income and low cost, with a strong current yield of 5.15 percent and a low expense ratio of 0.45 percent as of March 2022. The Wells Fargo Hybrid and Preferred Securities Aggregate Index is tracked by PSK.
- One of the biggest preferred stock ETFs available is the Invesco Preferred ETF (PGX), which has net assets of approximately $7 billion. Increased liquidity can lead to higher assets and more stable prices. As of March 2022, the yield on PGX was 5.20 percent, and expenditures were 0.51 percent. The ICE BofAML Core Plus Fixed Rate Preferred Securities Index is tracked by PGX.
- The Global X SuperIncome Preferred ETF (SPFF) may be the right investment for you if you're seeking a high yield. Its current yield of 5.69 percent is higher than the expense ratio of 0.58 percent for most preferred stock ETFs. As of March 2022, assets, however, were on the low side at under $215 million.
The conclusion
favored stock Investors seeking a means to diversify an income-focused portfolio may find that ETFs are a sensible alternative. For cautious investors, the combination of high dividends and decreased market risk, when compared to common stock, might be alluring. The greatest ETFs for long-term investors' portfolios may be found elsewhere, but those seeking growth may want to do so.