Preferred stocks pay dividends to shareholders before they pay dividends to holders of common stock. The dividend rate is fixed. In the event a company liquidates, holders of preferred stock receive distributions first. (See also: What's the Difference Between Preferred and Common Stock?)
One way to invest in preferred stocks is through exchange-traded funds (ETFs) that specialize in this type of equity. You receive the income from multiple stocks, and you have the comfort of having your investment spread across several companies.
We have chosen four preferred stock ETFS based on year-to-date returns as of February 3, 2017. All of the ETFs on our list have yielded above 3% for the year.
ETFs are easy to buy and sell because they trade like stocks. That said, these ETFs should be considered long-term investments for a well-diversified portfolio. The ETFs on our list represent a way to invest part of your funds in income-producing instruments, and may serve as an alternative to bonds.
iShares International Preferred Stock (IPFF)
This fund keeps 90% of its assets in stocks that are on the S&P International Preferred Stock Index, or in securities that are similar to stocks on that index. Some of the assets may be invested in futures contracts, options and swap contracts. IPFF invests in markets outside the United States, but only in developed markets. This is an ETF for investors who think stocks will perform well internationally.
- Avg. Volume: 63,956
- Net Assets: $66.45 million
- Yield: 5.00%
- YTD Return: 7.95%
- Expense Ratio (net): 0.55%
- Inception Date: November 15, 2011
- Since Inception: -2.44%
SPDR Wells Fargo Preferred Stock ETF (PSK)
PSK tracks the performance of the Wells Fargo Hybrid and Preferred Securities Aggregate index. Because the index is weighted by market capitalization, the underlying holdings in the fund tend to be similarly weighted. The fund may invest in securities that are not preferred stock, but are considered equivalent to preferred stock based on the way they function.
PSK aims to keep 80% of its assets in securities that are on the index. Note that the fund does not attempt to buy all securities on the index, but instead uses a sampling strategy whereby it purchases a portion of the index’s securities that are likely to produce results that are like the index. All stock and securities are purchased with the express purpose of representing the behavior of preferred stock.
- Avg. Volume: 109,225
- Net Assets: $488.9 million
- Yield: 5.92%
- YTD Return: 3.60%
- Expense Ratio (net): 0.45%
- Inception Date: September 16, 2009
- Since Inception: 7.46%
PowerShares Preferred ETF (PGX)
The benchmark for PGX is the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index. All holdings are fixed-rate securities that are denominated in U.S. dollars. Note that the underlying index is weighted by capitalization, and PGX attempts to replicate the performance of the index by weighting holdings based on capitalization.
- Avg. Volume: 3,019,541
- Net Assets: $4.21 billion
- Yield: 6.01%
- YTD Return: 3.09%
- Expense Ratio (net): 0.50%
- Inception Date: January 31, 2008
- Since Inception: 3.31%
PowerShares Financial Preferred ETF (PGF)
If you buy this ETF, you are tracking the Wells Fargo Hybrid & Preferred Securities Financial Index. The fund attempts to stay close to the index’s performance by keeping 90% of its assets in securities that are on the index. The securities are weighted by market capitalization. However, the fund may also invest in non-index instruments that function similarly to the preferred stocks in the index. All preferred stocks in the fund are traded on exchanges that are based in the U.S.
- Avg. Volume: 742,790
- Net Assets: $1.68 billion
- Yield: 5.91%
- YTD Return: 3.03%
- Expense Ratio (net): 0.63%
- Inception Date: December 1, 2006
- Since Inception: 4.06%
The Bottom Line
Preferred stocks offer income to investors that is reliable because the rates are fixed. However, preferred stocks can lose value in an environment where interest rates are rising. If interest rates go higher than the rate the stocks are paying, they will be less attractive to investors and share prices could drop. ETFs help mitigate this risk by buying several stocks.