It’s been a rough and tumble 2022 for the bond market with prices dropping and yields rising in turn. That could all change, however, if bond demand picks up in 2023.
As such, there are alternatives to relying on bond income, in which investors can extract more yield in their fixed income portfolios. At some point, the U.S. Federal Reserve will need to pump the brakes on rate hikes, paving the way for a bond rally.
Since bond prices move conversely with yield, that means income can drop, but price appreciation takes place. That said, investors can also look at preferred dividend stocks, especially if rate hikes cease.
“If rates do stabilize from here, it could provide a nice base of support for preferreds—hybrid securities that are part stock and part bond, and have acted like the worst of both worlds this year,” wrote Lawrence C. Strauss in Barron’s, noting that the S&P US Preferred Stock Index has dropped, but could serve as an area of value where investors can take advantage of a bottoming preferred market.
PFFD: An ETF With Preferred Exposure
For investors looking to supplement their fixed income, one exchange traded fund to consider for preferred stock exposure is the Global X U.S. Preferred ETF (PFFD ). The fund seeks to provide investment results that correspond generally to the price and yield performance of the ICE BofA Diversified Core U.S. Preferred Securities Index, which is designed to track the broad-based performance of the U.S. preferred securities market.
" Preferred stock is often analyzed alongside corporate & high yield bonds because of its yield-focused characteristics and fixed income-like behavior,” Global X research noted. “Preferreds sit junior on the capital structure to traditional bonds, and trade on an exchange offering additional liquidity.”
“For portfolio construction purposes, we believe they should be considered alongside corporate debt, high yield, and other income-generating asset classes like emerging market bonds and senior loans as a source of potential income,” Global X added. “Particularly when compared to corporate debt, we believe now may be the time to rotate money away from the more traditional portions of the fixed income market and into preferreds.”
Summary of PFFD benefits:
- High income potential: PFFD invests in a broad basket of preferred stock in the U.S., an asset class that has historically offered high yield potential.
- Low expense ratio: PFFD’s expense ratio of 0.23% is less than half the competitor average.
- Monthly distributions: PFFD makes distributions on a monthly basis. (The fund’s 30-day SEC yield is 6.61% as of November 23.)
For more news, information, and strategy, visit the Thematic Investing Channel.