3 Preferred Stock ETFs for High, Stable Dividends
While you can easily purchase individual preferred stocks, exchange-traded funds (ETFs) allow you to reduce your risk by investing in baskets of preferreds.
Preferred stocks typically aren’t first, second or even third to mind when investors think about what they want to include in their portfolios. But if you’re an income hunter and you don’t already have these stocks on their radar, you might want to give preferreds – and specifically, preferred stock ETFs – a look.
Preferred stocks are frequently referred to stock-bond “hybrids” because they contain elements of common stock (the type of stock you typically invest in) and bonds. For instance, like common stock, preferreds represent ownership in a company, and they typically trade on exchanges. However, like bonds, preferred stocks typically don’t include any voting rights.
The primary feature of preferred stocks, however, are their dividends. Preferred stock dividends are actually closer to bond coupon payments in nature, in that they’re typically set at a fixed amount. These dividends are high, too, often in the 5%-7% range.
But preferred stocks also tend to act more like bonds in that they trade around a par value. So while they’re a great source of fixed income, they’re not going to shoot considerably higher, like common stocks, as a company grows.
They're not without their risks, either.
"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 indeed, a popular index of preferred stocks is off 13% so far in 2022. "Given that, preferreds should always be considered long-term investments since fluctuating interest rates can have outsized effects on preferred security prices."
While you can easily purchase individual preferred stocks, exchange-traded funds (ETFs) allow you to reduce your risk by investing in baskets of preferreds. That helps to prevent any single preferred-stock disaster from undermining your portfolio.
With that in mind, here are three preferred stock ETFs to buy.
Data is as of May 26. 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: $15.8 billion
- SEC yield: 4.7%
- Expenses: 0.46%, or $46 annually on a $10,000 investment
The iShares Preferred and Income Securities ETF (PFF, $34.25) is the largest, most liquid preferred stock ETF on the market. At $15.8 billion in assets under management (AUM), it’s about 2.5 times the size of its second-biggest competitor, First Trust Preferred Securities & Income ETF (FPE). It’s also cheaper than FPE by 39 basis points (a basis point is one one-hundredth of a percentage point).
PFF is as straightforward as it gets, and many (though not all) competitors are built in a similar fashion.
The 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 60%) come from financial-sector firms such as Wells Fargo (WFC) and Bank of America (BAC). Another 22% come from the industrial sector, and 14% come from utilities. The small remainder is sunk into cash and agency bonds.
iShares Preferred and Income Securities ETF yields less than 5% right now, but that's still much better than most sources of yield in both the stock and bond markets.
VanEck Vectors Preferred Securities ex Financials ETF
- Assets under management: $984.9 million
- SEC yield: 5.7%
- Expenses: 0.40%
The VanEck Vectors Preferred Securities ex Financials ETF (PFXF, $19.19) stands apart from most other preferred stock ETFs. All you need to do is look at its name to see how.
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 (33%), real estate investment trust, or REIT (15%) and telecommunication services (10%) preferreds, as well as exposure to about 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 nearly 130% stocks still hold up today thanks to a combination of higher-than-average yield and one of the lowest fees in the preferred-stock space.
InfraCap REIT Preferred ETF
- Assets under management: $70.8 million
- SEC yield: 6.8%
- Expenses: 0.45%
Virtus Investment Partners’ InfraCap REIT Preferred ETF (PFFR, $19.83) 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 data center operator Digital Realty (DLR) and office-and-retail property owner Vornado Realty Trust (VNO). Others come from mortgage REITs (mREITs) such as Annaly Capital Management (NLY) 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. Even in just a near-bear market like the downturn we've run into during 2022, it's underperforming other more traditional REITs by a few percentage points.
On the flip side, InfraCap REIT Preferred ETF is rewarding new money with one of the best yields among preferred stock funds.