Preferred stocks are a type of hybrid security that show bond- and equity-esque characteristics. The shares are issued by financial institutions, utilities and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds. Additionally, preferred stocks issue dividends on a regular basis, but investors are unlikely to enjoy capital appreciation on par with common shares.
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While preferred stocks provide investors with an attractive source of yields, potential investors should keep in mind that the assets are vulnerable in a rising interest rate environment. If rates rise, the holdings must decline in price to elevate their yield to attractive levels. Furthermore, most preferred stocks are either perpetual or long-dated, which exposes investors to significant interest-rate risk.
“The correlation of preferreds was 0.43 with High Yield Bonds, 0.39 with Common Stocks, 0.16 with 10 Year Treasuries, and 0.04 with corporate bonds (over the last 10 years ending December 2015,” according to Global X.
For more information on Fixed-Income ETFs, visit our Fixed-Income category.
Global X SuperIncome Preferred ETF