“Majority of preferred securities are concentrated in the financials sector, which may add unnecessarily to existing financials exposure from other investments,” Jones said.
Additionally, an ex-financials preferreds portfolio could produce better risk-adjusted returns.
“Excluding traditional financials improved the long-term risk/reward trade off relative to other preferreds and competitiveness with equity and high yield,” Jones added.
Preferred securities provide competitive yield with a higher payout than its common stock and senior debt, has favorable tax treatment as distributions may be treated as qualified dividend income and are senior in structure or rank higher than common stock in the event of bankruptcy.
Potential investors should be aware of risks. For instance, preferreds are subject to interest rate risk and market risks as the securities are sensitive to rate changes and market events. Issuers have the right to redeem the security prior to maturity, causing investors to reinvesting capital at lower rates. Issuers can defer payment of distributions in the event of financial distress, and in some cases, issuers may be unable to meet obligations to investors.
To gain exposure to the preferreds ex-financial space, investors may consider the VanEck Vectors Preferred Securities ex Financials ETF (NYSEArca: PFXF), which has been one of the best performing preferred securities-related ETFs of 2016, rising 11.1% year-to-date. PFXF has also generated an attractive 5.62% 12-month yield.
Financial advisors who are interested in learning more about preferred securities can watch the webcast here on demand.