The Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI) is the newest addition to Principal’s ETFs lineup and it could prove to be one of this year’s most well-time launches given its income emphasis in a low-yield environment.
PQDI components include, without limitation, preferred securities and capital securities of U.S. and non-U.S. issuers. The fund invests significantly in securities that, at the time of issuance, are eligible to pay dividends that qualify for favorable U.S. federal income tax treatment, such as dividends treated as qualified dividend income (QDI) or qualified dividends from real estate investment trusts (REITS).
“Preferred stock funds are often described as a stock/bond hybrid because they share traits from both of these categories,” writes Morningstar analyst Amy Arnott. “Like bonds, they carry credit ratings and rank higher in the capital structure than common stocks. However, they’re subordinate to bonds in the capital structure, and their interest payments aren’t subject to the same guarantees as bonds.”
PQDI is an actively managed so it can take some of the risks out of the income-generating equation for yield-hungry investors and that’s meaningful at a time when so many high dividend stocks are cutting or suspending dividends.
Built for This Environment and Beyond
Lower correlations to common stocks and traditional fixed income investments also make preferred attractive portfolio diversification tools.
Preferreds are conducive to the PQDI strategy because they payouts from this asset class are qualified, making preferreds a viable alternative to taxable bond strategies, income from which is taxed at the ordinary rate.
Additionally, there are some risks associated with REITs, but as an active fund, PQDI can avoid REITs that could be payout offenders.
“Real estate funds are a riskier bet for yield. They’ve been subject to large losses during market downturns and also face an uncertain future if the coronavirus pandemic leads companies to adopt more-permanent work-from-home policies,” according to Morningstar’s Arnott.
At the end of the day, higher yields usually mean increased risk, but PQDI can take some of the edges out of that proposition.
That added risk “makes it important to navigate the options carefully and make sure you’re comfortable taking on additional volatility before adding a higher-yielding investment to your portfolio,” notes Arnott.
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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.