ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Alternatives
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Dividend
    • Dual Impact
    • Emerging Markets
    • Energy Infrastructure
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Free Cash Flow
    • Future ETFs
    • Global Diversification
    • Gold/Silver/Critical Minerals
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Market Insights
    • Megatrends
    • Modern Alpha
    • Multi-Asset
    • Night Effect
    • Portfolio Strategies
    • Retirement Income
    • Richard Bernstein Advisors
    • Tax Efficient Income
    • Thematic Investing
    • Volatility Resource
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
    • ETF Data for Journalists
    • ETF Nerds
  • Research
    • First Bitcoin ETF
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • Company
    • About Us
    • Swag Store
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Fixed Income ETFs
  2. Preferred Stock ETFs: 3 Things to Know
Fixed Income ETFs
Share

Preferred Stock ETFs: 3 Things to Know

Cory MitchellJun 24, 2015
2015-06-24

Preferred stocks are just one popular market segment accessible through ETFs. Almost every corner of the global financial landscape can be traded via ETF, and with U.S. interest rates at all time lows, preferred shares and the ETFs associated with them are attracting additional investor attention.

What’s the Appeal?

picking one over the others

A preferred share is like a hybrid between a common stock and a bond. When you buy preferred shares, you own a piece of the company and in exchange receive fixed dividend payments set at issuance with the par value of the preferred stock.

The main benefits of owning preferred shares are as follows:

  • Tax-efficient yield: Unlike a bond, the payments received are dividends and therefore taxed at a preferential rate to interest income.
  • Pre-determined dividend rate: With a preferred share you know what the dividend is. Unlike a common share whose dividend rate can be changed at any time, with a preferred share all provisions are laid out at issuance so investors know the expected return. It is important to note though that there are different types of preferred shares. “Rate Reset” preferreds pay a fixed dividend up to the reset date, at which point the company can implement a new rate that will remain in effect until the next reset day.
  • Diversification: Preferred shares typically have a low correlation with bonds and common stocks since they are hybrid of the two.
  • Higher Capital Structure Rank: In the event the company goes insolvent, preferred shareholders rank higher than common shareholders in their right to liquidation proceeds. Preferred shareholders are also paid out their dividends before common equity holders receive theirs. This provides more security than common shares.
  • Lower Volatility: Preferred shares typically trade around the par value, making them less volatile than common stock, but more volatile than bonds. Preferreds represent the middle ground between bonds and common stock.

Be sure to also see our Visual Guide to Investing in Preferred Stock ETFs.

The main drawbacks are that capital appreciation is likely to be lower than what is available in the common equity market, and preferred shareholders don’t receive voting rights.

ETFs offer a way to own a basket of preferred shares that provide more diversification than just owning a single stock, and they are more efficient than buying multiple stocks. The iShares S&P 500 US Preferred Stock Index Fund (PFF A+) and the PowerShares Preferred Portfolio (PGX A-) are two of the largest and most popular ETFs in the space.


Content continues below advertisement

Interest Rates Matter

Like a bond, interest rates have an inverse effect on the price of preferred shares. When interest rates rise, it puts downward pressure on the price. When interest rates fall, there is upward pressure on the price of preferred shares. This is because the dividend payment is fixed, so if interest rates rise, the price will fall so that the new yield on the security is market competitive. Similarly, when interest rates fall, the price will rise to reduce the yield and once again make it market competitive.

See also the 10 Questions About ETFs You’ve Been Too Afraid To Ask.

As Mariela Jobson, Vice President and Portfolio Manager at iShares, reminds us, preferred shares are a hybrid; therefore, investors can’t expect the same direct price-to-interest rate relationship that’s seen in the bond market. Like common stock, a rosy outlook and rising interest rates due to a strong economy may also help bolster preferred shares, somewhat offsetting the negative price effect of rising interest rates.

The current Federal Reserve policy has been to keep rates low. The current target rate midway through 2015 is 0 to 0.25%, and has been so since late 2008. The low yield offered in money market instruments has increased the popularity of higher yielding preferred shares. Preferred shares are likely to continue to hold prominence in a low interest rate environment, but will decline if interest rates are forced up. However, since these share are a hybrid, they will likely be less negatively affected by rising interest rates.

Not All Preferred Stock ETFs Offer High Yields

One of the key benefits of preferred shares is that they typically offer attractive yields, but not all ETFs actually deliver on that.

For the 10 ETFs in the ETFdb Preferred Stock category, the range in yield varies from 6.82% down to 3.84% as of May 19, 2015. When putting investment dollars to work, picking the right preferred shares ETF matters.

Below, we highlight the top performing funds in the category according to dividend yield (as of May 19, 2015):

Ticker ETF NameAnnual Dividend Yield (%)Expense Ratio
(SPFF C+)Global X SuperIncome Preferred ETF6.82%0.58%
(PGX A-)PowerShares Preferred Portfolio5.96%0.50%
(PGF B)PowerShares Financial Preferred Portfolio5.80%0.63%
(PSK B+)SPDR Wells Fargo Preferred Stock ETF5.25%0.45%

The Bottom Line

Preferred shares are a hybrid between common stocks and bonds, offering a fixed dividend but no voting rights. An ETF allows investors to buy a diversified basket of preferred shares with the convenience of one purchase. Not all preferred share ETFs are created equal, however, and annual dividend yields vary drastically, so choose carefully. Preferred share prices move inversely to interest rates, so if interest rates rise this will put downward pressure on the price. But since preferreds also have common stock characteristics, the negative impact of rising interest rates is likely to be somewhat subdued relative to the impact on bonds.

For more ETF analysis, make sure to sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.

Image courtesy of ddpavumba at FreeDigitalPhotos.net

» Popular Pages

  • Tickers
  • Articles

Feb 03

Main Management Market Note: February 3, 2023

Feb 03

SPYI, a High-Income ETF Within Equities, Up 10%

Feb 03

Navigating Exchange FOMO for Advisors

Feb 03

In 2022, Main Supply of EU Electricity Was Renewable

Feb 03

VettaFi’s ETF Rising Stars: January 2023

Feb 03

Big Tech Is No Longer Certain; Consider Active

Feb 03

Equal-Weight Cloud Computing ETF WCLD Hits Buy Signal

Feb 03

American Century's KORP, VALQ Hit 5-Year Mark

Feb 03

Bitcoin Opens 2023 Strong, Outperforms Bonds

Feb 03

These 2 ETFs Show Growth Is Back in Style

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

VOO

Vanguard S&P 500 ETF

VGT

Vanguard Information...

SMH

VanEck Semiconductor ETF

XLK

Technology Select Sector SPDR...

VTI

Vanguard Total Stock Market...

SOXX

iShares Semiconductor ETF

BLOK

Amplify Transformational Data...

META

Roundhill Ball Metaverse ETF

Loading Articles...
Help & Info
  • Contact Us
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.
Follow ETF Database
Follow ETF Database

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X