- 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.
Moreover, international government bond yields have been depressed to near zero levels, with Germany 10-year yields down 45 basis points and Japanese 10-year yields dipping into the negative territory, while yields on 10-year Treasury bonds were hovering around 1.83%. Consequently, international fixed-income investors may be steering toward higher-yielding U.S. Treasuries, which may help put a lid on rising rates in the U.S.
“This is an important development,” Koesterich added. “Even if we see an improvement in the U.S. inflation and growth outlook, we function in a global bond market. As such, ultra-low international bond yields will dampen any rebound in U.S. interest rates. This, in turn, suggests that the quest for reliable, less volatile sources of yield will continue.”
Investors who are focusing on income generation can take a look at a number of preferred stock ETF options to bolster yields. For example, the PowerShares Preferred Portfolio (NYSEArca: PGX) has a 5.89% 12-month yield, Global X SuperIncome Preferred ETF (NYSEArca: SPFF) has a 7.59% 12-month yield, First Trust Preferred Securities and Income ETF (NYSEArca: FPE) has a 5.98% 12-month yield and SPDR Wells Fargo Preferred Stock ETF (NYSEArca: PSK) has a 5.37% 12-month yield.
Alternatively, investors may also consider the PowerShares Variable Rate Preferred Portfolio Fund (NYSEArca: VRP) in a rising rate environment. Variable-rate preferreds usually trade more like bonds with shorter durations, so more conservative investors may find the lower-risk profile more appealing. However, VRP comes with a lower 5.14% 12-month yield.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.