High-Yield Preferred Stock ETFs for a Low-Rate Environment

By Tom Lydon, ETF Trends

With the economy essentially stalling out over the first quarter, diminishing the likelihood of an interest rate hike any time soon, investors may be tempted to steer toward attractive yield-generating assets, such as preferred stock exchange traded funds.

Income investors may like preferred stock ETFs since the asset class offer stable dividends, don’t come with taxes on qualified dividends for those that fall into the 15% tax bracket or lower, are senior to common stocks in the event liquidation occurs, are less volatile than bonds and provide dividend payments before common shareholders, writes Dan Moskowitz for Investopedia.

Preferred stocks are a type of hybrid security that show bond- and equity-esque characteristics. The shares are issued by financial institutions, utilities and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds.

Additionally, preferred stocks issue dividends on a regular basis, but investors are unlikely to enjoy capital appreciation on par with common shares.

However, while preferred stocks provide investors with an attractive source of yields, the assets are vulnerable in a rising interest rate environment. If rates rise, the holdings must decline in price to elevate their yield to attractive levels. Furthermore, most preferred stocks are either perpetual or long-dated, which exposes investors to significant interest-rate risk.

The PowerShares Preferred Portfolio (NYSEArca: PGX), which tries to reflect the performance of the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index, is broad U.S. preferred stock ETF option. The fund has a 0.50% expense ratio and a 5.9% 12-month yield.

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PowerShares Preferred Portfolio (NYSEArca: PGX) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.59% (as of 29 April 2015).  Year to date the portfolio is up 3.29% compared to the S&P 500 which is up 2.3%.

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.