Preferred stock exchange traded funds have become another way for investors to play the yield theme in the uncertain market. As investors search for ways to earn capital on their investments, preferred stocks have become a counterpart for dividend strategies.
However, as Europe’s debt crisis continues to roil markets, investors need to be aware that preferred ETFs have heavy concentrations in the financial sector.
“Preferreds are hybrid securities that have characteristics of both stocks and bonds, and are typically issued by financial institutions, utilities, and telecom firms. They make regular income payments and are rated by the major credit-rating agencies,” Timothy Strauts for Morningstar wrote. [Preferred ETFs Yielding Over 6%, But Come with Risks]
Investors are seeking funds that will help them make a return on their capital, as Treasury yields are historically low. Currently, the yield on a 10-year Treasury bond has been under 1.8%. Preferred shares and ETFs are an interesting choice because they are hybrids that represent both equities and fixed-income.
Preferred shares are classified as shares having a fixed rate of dividend on their face value (par value), Zacks reports. These types of shares generally get preference over equity shares in terms of both dividend payments as well as at the time of liquidation should the firm go belly-up. [Investors Chase Yield with Preferred Stock ETFs]