The iShares S&P U.S. Preferred Stock Index Fund (NYSEArca: PFF) is up 3% so far this year and just capped its sixth straight quarter of gains to trade at its highest price level since the financial crisis.
For conservative investors who want to avoid volatility and generate yield, preferred stock ETFs have fit the bill nicely. PFF, the category’s largest ETF with $11.9 billion in assets, pays a 12-month yield of 6%.
Slow and steady wins the race, especially for investors shell-shocked by the dot-com meltdown and 2008 global credit storm. [Preferred ETF Trying to Break Out]
And with the Federal Reserve holding short-term interest rates near zero, investors who rely on income have been forced to take on more risk in search of yield. They have gravitated to ETFs tracking high-yield corporate bonds, dividend stocks and preferred shares, for example.
For over three years, investors in preferred stock ETFs have been able to relax and let those dividend payments roll in like clockwork, with very little price volatility to boot.
But are they being lulled into a false sense of security? Eric Parnell, founder of Gerring Wealth Management, thinks so.
“Preferred stocks are one such category where income thirsty investors have been flocking as of late. Unfortunately, these same investors are now sitting on what is effectively an unexploded bomb and they may not even know it,” he writes in a Seeking Alpha post.
‘Unexploded ordinance’
Preferred shares are hybrid securities that combine features of both stocks and bonds.