Why Preferred Stock ETFs Are Shining

When the term “preferred stock” comes up, does it conjure images of exclusive shares that only sophisticated investors can purchase? The fact is, anyone can buy preferred stock now – through exchange traded funds (ETFs).

Don Dion for TheStreet says that the preferred ETFs offer access and diversification along with increased liquidity for the preferred shares. Owners of preferred stock have a higher claim on assets and earnings than owners of common stock.

There are several reasons that these shares and ETFs have attracted more attention lately:

• Financial shares have shown marked weakness because of the housing and credit meltdown. Their yields have declined quickly.
• The payouts provided by preferred securities have the payout advantage of bonds and the tax advantage of common dividends.
• Some investors treat their preferred shares as havens. The Jobs and Growth act of 2003 reduced the tax on dividends, making payouts from these funds relatively tax efficient.

A sample of preferred ETFs:

• PowerShares Preferred (PGX): up 3.4% year-to-date

• iShares S&P U.S. Preferred Stock Index (PFF): up 14.9% year-to-date