• ETF investors may want to consider preferred stocks as government yields hover near record lows
  • Low inflation helps bond investors generate a higher real yield, or yield after accounting for the inflation bite
  • International government bond yields have been depressed to near zero levels

With government yields hovering near record lows, exchange traded fund investors may want to consider alternative income-generating assets like preferred stocks.

“For investors in search of yield, we continue to favor U.S. preferred stocks, which have outperformed U.S. large caps by roughly 500 bps year-to-date,” according to Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock.

For instance, the iShares U.S. Preferred Stock ETF (NYSEArca: PFF) has a 5.82% 12-month yield and only dipped 0.9% year-to-date, compared to the S&P 500 index’s 5.1% decline.

Investors may be seeking out alternative high-yield assets as we settle in for a prolonged low-yield environment.

“This is partly due to inexplicably low inflation expectations, with 10-year expectations down 20 basis points (bps) (0.20%) this year, although they have bounced from their February lows,” Koesterich explained. “At the same time, real (that is, inflation-adjusted) interest rates are down by half since mid-January.”

Low inflation helps bond investors generate a higher real yield, or yield after accounting for the inflation bite.

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