A Big Change for a Popular Preferred ETF

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.

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.

However, despite the Fed’s plans to hike interest rates multiple times this year, we may still be in for an extended low-rate environment as many risks could keep a lid on yields and support safe-haven demand for fixed-income assets.

“The big decline in potential returns in Bank of America’s index stemmed from the yield-to-worst measure, which represents the yield investors would receive if issuers bought back their securities at face value en masse as soon as they were eligible to, instead of continuing to pay dividends at their current levels. That measure dropped to 2.28 percent on March 22 from 5.05 percent the day before,” according to Bloomberg.

PGX currently has a distribution rate, a metric widely followed by retail investors, of almost 5.6%, according to issuer data.