A Case Remains for Preferred ETFs

“Investors should expect preferred securities to be one of the more volatile fixed-income asset classes, and this volatility must be accepted as a tradeoff for the potential of higher yields inherent in the sector,” according to a Wells Fargo Investment Institute note posted by Amey Stone of Barron’s.

Income investors have looked to preferred stock ETFs in their portfolios for a number of reason. For instance, the asset class offers stable dividends, does not come with taxes on qualified dividends for those that fall into the 15% tax bracket or lower, is senior to common stocks in the event liquidation occurs, is less volatile than bonds and provides dividend payments before common shareholders.

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“If investors are uncomfortable with the recent preferred-stock price decline, they may be over-allocated to the sector. For investors who are more comfortable with the potential volatility in the sector, we advise holding the course in the near term. Preferred securities can provide meaningful income, and we expect this sector to continue doing so,” according to the Wells Fargo note seen in Barron’s.

iShares S&P US Preferred Stock Index Fund (NYSEArca: PFF)