Preferred stocks typically don't even make the podium as it pertains to what investors plan on including in their portfolios. But if you're an income investor and you don't already have these stocks on your radar, you'll want to give preferreds – and specifically, preferred stock ETFs – a look.
You'll frequently hear preferred stocks referred to as "hybrid" securities. That's because they carry some elements of common stock (what you typically mean when you say "stock") and bonds. For instance, preferred stocks represent ownership in a company and trade on exchanges – just like common stock. However, they typically don't include any voting rights – just like bonds.
But most people who are interested in preferreds are lured in by their dividends. Now, these are also more like bonds' coupon payments in these dividends are typically set at a fixed amount. But they're high – sky-high – often in the 5% to 7% range!
Another element preferreds share with bonds is that they trade around a par value. That means while they're a great source of fixed income, they tend to move calmly, never really swinging drastically higher or lower in any given year. But 2022 was quite the exception, with the main preferred benchmark off 18.1% year-to-date – its worst year since the depths of the Great Recession.
What gives?
"Since preferred securities have long maturities, or no maturities at all, they tend to have high interest-rate risk, or the risk that prices will fall when yields rise," says Charles Schwab. And in 2022, the Federal Reserve jolted its target Fed funds rate from 0%-0.25% to 3.75%-4.00%, sending high-rate-risk assets including (bonds and preferreds) into the toilet.
But the Federal Reserve signaled in late 2022 that it's getting ready to start taking its foot off the pedal, bringing renewed hope to preferreds. And while you can easily purchase individual preferred stocks in most standard brokerage accounts and IRAs, we recommend exchange-traded funds (ETFs), which invest in baskets of preferreds, preventing any single preferred-stock disaster from undermining your portfolio.
With that in mind, here are five preferred stock ETFs to buy in 2023.
Data is as of Dec. 2. SEC yield reflects the interest earned for the most recent 30-day period after deducting fund expenses. SEC yield is a standard measure for preferred-stock funds.
iShares Preferred and Income Securities ETF
- Assets under management: $14.0 billion
- SEC yield: 6.1%
- Expenses: 0.45%, or $45 annually on a $10,000 investment
Preferred stock ETFs don't get any bigger than the iShares Preferred and Income Securities ETF (PFF (opens in new tab), $32.28) – one of the oldest such funds on the market. At $14.0 billion, it dwarfs its second-largest competitor, the First Trust Preferred Securities & Income ETF (FPE (opens in new tab)), by more than double. Price helps: It's a full 40 basis points cheaper than FPE. (A basis point is one one-hundredth of a percentage point.)
PFF is also the prototypical preferred-stock fund, with many (not all, but many) competitors built in a similar fashion.
This ETF invests in nearly 500 different preferred stocks, almost entirely from U.S.-based companies. The lion's share of PFF's preferreds (more than 66%) comes from financial-sector firms such as Wells Fargo (WFC (opens in new tab)) and Citigroup (C (opens in new tab)). Another 19% comes from the industrial sector, and 13% comes from utilities. The small remainder is sunk into cash and agency bonds.
iShares Preferred and Income Securities ETF yields a juicy 6% right now – much better than Treasuries and corporate bonds, and the stock market, at the moment.
Learn more about PFF at the iShares provider site. (opens in new tab)
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VanEck Vectors Preferred Securities ex Financials ETF
- Assets under management: $951.40 million
- SEC yield: 6.7%
- Expenses: 0.40%
The VanEck Vectors Preferred Securities ex Financials ETF (PFXF (opens in new tab), $17.64) stands apart from most other preferred stock ETFs.
All you need to do is look at its name to see why.
PFXF was one of several "ex-financials" ETFs that popped up in the years following the 2007-09 bear market and financial crisis. While most stocks took a beating then, banks and other financial-sector stocks were at the epicenter of the crisis. Trust was eroded, so much so that ETF providers knew they could attract assets by offering products that ignored the sector altogether.
VanEck Vectors Preferred Securities ex Financials ETF, which was introduced in 2012, instead has healthy helpings of electric-utility (27%), real estate investment trust, or REIT (17%) and telecommunication services (12%) preferreds, as well as exposure to more than a dozen other industries, such as healthcare equipment, semiconductors and diversified retail.
PFXF's ex-financials nature isn't as important as it used to be. Banks are far better capitalized and regulated now than they were in 2007, so the risk of another near-collapse doesn't seem as dire. That said, VanEck's ETF and its portfolio of roughly 120 stocks is still one of the top preferred ETFs you can buy thanks to a combination of higher-than-average yield and one of the lowest fees in the preferred-stock space.
Learn more about PFXF at the VanEck provider site. (opens in new tab)
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Global X SuperIncome Preferred ETF
- Assets under management: $202.6 million
- SEC yield: 7.0%
- Expenses: 0.58%
There's nothing subtle about the Global X SuperIncome Preferred ETF (SPFF (opens in new tab), $10.09) whose primary goal – super income – is right there in the name.
SPFF invests in 50 of the highest-yielding preferred stocks listed in the U.S. and Canada, producing one of the biggest yields among preferred stock ETFs, at an impressive 7.0% currently. Of course, by focusing on yield, SPFF can sometimes sacrifice quality. Indeed, its exposure to investment-grade preferreds (38%) is considerably lower than PFF (48%), while exposure to junk-rated bonds (36%) is higher than PFF (28%). The remainder of each's holdings are unrated.
Sector exposure isn't anything novel, though. Financials are tops at more than 70% of assets, followed by single-digit exposure in energy, industrials, and a handful of other sectors.
To be fair, SPFF has been an underperformer for most of its life since inception in July 2012. However, it held up better than most preferred stock ETFs in the dregs of 2022, thanks in part to its superior yield – a yield that's paid monthly, by the by.
Learn more about SPFF at the Global X provider site. (opens in new tab)
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Principal Spectrum Preferred Securities Active ETF
- Assets under management: $389.9 million
- SEC yield: 4.9%
- Expenses: 0.55%
If you, ahem, prefer to jump aboard the active ETF craze, there's a preferred fund for that: the Principal Spectrum Preferred Securities Active ETF (PREF (opens in new tab), $17.04).
PREF's six-person management team boasts an average of roughly 29 years of experience. They're tasked with buying $1,000 par preferreds with "attractive yields, diversification benefits and reduced risk compared to other fixed-income securities."
This is one of the most concentrated preferred portfolios you'll find among these ETFs, at just 84 stocks currently. Nearly three-quarters of assets are dedicated to financials (sound familiar?), with 14% more in utilities, 6% in comms, and the rest sprinkled across a handful of other sectors.
PREF does suffer from a fairly low yield for the space. But that reflects an extremely high-quality portfolio where a majority of assets are investment-grade. Most of that (60%) is BBB-rated preferred stocks, but another 13% or so are in A- and AAA-rated preferreds. (The remainder are BB, which is the highest level of junk.)
No wonder, then, that PREF has delivered extremely competitive performance since its 2017 inception.
Learn more about PREF at the Principal Asset Management provider site. (opens in new tab)
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InfraCap REIT Preferred ETF
- Assets under management: $58.9 million
- SEC yield: 8.1%
- Expenses: 0.45%
Virtus Investment Partners' InfraCap REIT Preferred ETF (PFFR (opens in new tab), $17.55) is, like PFXF, among the few preferred stock ETFs that come with a twist.
Also like PFXF, that twist is evident in the name.
PFFR invests in a group of about 100 preferreds exclusively within the real estate space. Some of those preferreds come from traditional REITs such as hotel operator Hersha Hospitality Trust (HT (opens in new tab)) and office-and-retail property owner Vornado Realty Trust (VNO (opens in new tab)). Others come from mortgage REITs (mREITs) such as Annaly Capital Management (NLY (opens in new tab)) that own "paper" – mortgages and mortgage-backed securities – rather than physical real estate.
Why REIT preferreds?
InfraCap says "these securities are also typically exposed to less leverage with generally more predictable revenue streams than those issued by banks and insurance companies."
While that's an attractive proposition, just understand the potential risk involved with putting all your eggs in one sector basket – especially if America enters another real estate crisis like the housing bubble burst of the late aughts. 2022's bear market in real estate is an excellent example, dragging PREF several percentage points lower than many of its traditionally built preferred-stock brethren.
If there's an upside, it's that the InfraCap REIT Preferred ETF is rewarding new money with one of the best yields among preferred stock funds.
Learn more about PFFR at the Virtus provider site. (opens in new tab)
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