What is a 'Preferred Stock ETF'

The preferred stock ETF is an exchange-traded fund that deals primarily in preferred stocks or shares.

BREAKING DOWN 'Preferred Stock ETF'

Preferred stock shares are hybrid funds, containing the features of both debt and equity instruments. This grants preferred shareholders the opportunity to purchase them before common shareholders are eligible. It also allows them to receive their payouts and dividends prior to those that hold common stock. However, their claims remain subordinate to those of the debt-holders. The class of ownership of a preferred stock grants the holder primary claim in the event of liquidation as well.

Preferred stock ETF’s also allow investors to receive income from multiple sources that are spread across more than one sector, unlike traditional ETF’s that are sector specific. This allows for greater diversification of assets in the event that a market begins to decline. To be considered a preferred stock or share, the commodity or asset would need to have a higher than normal yield.  

Anyone looking to invest in preferred stock ETF’s should discuss the benefits of doing so with a licensed broker.

What is Preferred Debt

Preferred debt is a debt that takes precedence over all other open debt. In the event of a default, the preferred debt is the one that must be paid first. For example, when it comes to real estate the preferred debt is the primary mortgage. When the mortgage is taken out the debt is put into first lien position, meaning this is the preferred debt. Any additional debt that is secured against the property, like a second mortgage or home equity line of credit (HELOC), would take a secondary lien position. If the borrower were to default or file for bankruptcy, these debts would be settled after the primary mortgage had been discharged.

For example, if a homeowner has a judgment or lien placed against their property for outstanding real estate taxes, this amount would default to a secondary position, leaving the preferred debt as the primary mortgage. Almost all mortgages are recorded this way on the title report. Some privately-held mortgages may be recorded differently at the behest of the lender. A private lien holder may choose to subordinate their debt to another lender for personal reasons, but in order for the preferred debt holder to have legal claim over their right to be the first account discharged, the recording would have to reflect that.

During the subprime lending era it was common for homeowners to carry more than one mortgage on their property. These mortgages would be recorded in first and second lien position, with the larger of the two generally retaining the primary lien position, even when the mortgages were recorded simultaneously.

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