Following a savage repudiation of the asset class last year amid seven interest rate hikes by the Federal Reserve, preferred stocks and the relevant exchange traded funds are on the mend in 2023.
That includes the (PFXF ), which entered Thursday with a 9.5% year-to-date gain, good enough for slight out-performance of the widely observed ICE Exchange-Listed Preferred & Hybrid Securities Index.
PFXF is accomplishing that impressive feat with a 30-day SEC yield of 6.33%, or 41 basis points ahead of the ICE Exchange-Listed Preferred & Hybrid Securities Index. Of course, with a big yield like that, PFXF is somewhat beholden to the Federal Reserve’s decisions regarding interest rates. On that note, it’s all the more impressive that PFXF is higher this year, considering the same is true of 10-year Treasury yields and that the Fed already raised borrowing costs once, albeit by just 25 basis points.
In other words, preferred stocks are a rate-sensitive asset class and it’s easy to understand why that’s the case. These securities often feature lengthy maturities — in some cases multiple decades — indicating that if they were traditional bonds, they’d be considered long duration fare.
“This is where the risk comes in. For instance, the lengthy maturity of these instruments means that they are more sensitive to rising interest rates, and that means the market value of the preferred shares will decline,” wrote Darla Mercado for CNBC.
Still, PFXF offers some notable benefits. For example, as its name implies, the ETF doesn’t hold preferred stocks issued by banks. That could be a plus if the U.S. economy contracts in a material fashion, because banks are typically recession-sensitive.
Additionally, preferred issuers can suspend dividends during recessions, indicating that issuer credit profiles are essential in evaluating this asset class. Fortunately for investors considering PFXF, the VanEck ETF has more exposure to investment-grade preferreds than junk equivalents, but the fund’s holdings in the latter camp are graded at the higher end of high-yield territory.
Another element to ponder is exactly what an investor’s income needs are, because that can dictate how much of a portfolio should be directed to preferred stocks or ETFs such as PFXF.
“How much of your portfolio you’d like to commit to preferred shares will also depend on your needs as an investor, as well as your risk appetite,” according to CNBC. “For starters, individual preferred shares aren’t great for price appreciation. But they do offer income for older investors who prioritize a steady payout over runaway growth.”
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