Amid expectations that a less aggressive tenor of interest rate increases will arrive in 2023, some market observers are looking at high-yield asset classes that stumbled this year amid seven interest rate increases by the Federal Reserve.
Preferred stocks and exchange traded funds such as the VanEck Preferred Securities ex Financials ETF (PFXF ) are among the high-yield assets that that dealt with plenty of headwinds in 2022. However, that picture could turn brighter in 2023 and PFXF has some sources of allure.
As its name implies, PFXF doesn’t hold preferred stocks issued by banks, which makes for an interesting strategy considering banks are the largest issues of preferred stocks. However, the VanEck ETF does hold some preferreds issued by real estate investment trusts (REITs) and that’s pertinent to income investors because some analysts are bullish on REIT preferreds.
“REIT preferreds invariably are cumulative, a favorable feature. This means that issuers need to make up any missed dividends before paying dividends on their common shares. While preferreds don’t have the same security as debt, issuers are loath to omit preferred dividends. During the financial crisis, most banks continued to pay preferred dividends in full even when common dividends were slashed,” reports Andrew Bary for Barron’s.
Preferreds issued by commercial and residential REITs account for 17.76% of PFXF’s 121 holdings. That’s the ETF’s second-largest industry exposure behind the 28.87% devoted to utilities preferreds. Public Storage (NYSE:PSA) is the dominant REIT issuer of preferreds and as such, several of its $4 billion worth of preferred share reside in PFXF.
Mortgage REITs (MREITs), such as Annaly Capital Management (NASDAQ:NLY) Agnc Investment Corp. (NASDAQ:AGNC), are also major REIT preferred issuers. Both are PFXF member firms.
PFXF could be the preferred mousetrap for investors seeking exposure to REIT-issued preferreds because the ETF removes the preferred selection burden while solving for some of the liquidity issues associated with the REIT corner of the preferred market.
“The REIT preferred market is geared toward retail investors with most issues carrying a $25 face value and traded on the NYSE like the issuer’s common shares,” according to Barron’s. “The retail orientation reflects the small size of REIT preferred issues, making them less liquid and therefore less appealing to institutional investors.”
PFXF, which sports a 30-day SEC yield of 6.78%, could also be a value play for income investors in 2023 because many REIT preferreds suffered deep double-digit losses this year as Treasury yields surged.
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