Preferred stocks and the related exchange traded funds are considered high-yield assets and as such, there’s some vulnerability to rising interest rates.
But while the Federal Reserve is boosting rates, the fact is yields on government debt remain paltry, compelling investors to consider preferred stocks, which display both equity and fixed income properties. Indeed, the ICE Exchange-Listed Preferred & Hybrid Securities Index is off 9% year-to-date.
However, the VanEck Vectors Preferred Securities ex Financials ETF (PFXF) is performing significantly less poorly than that. PFXF, which tracks the ICE Exchange-Listed Fixed & Adjustable Rate Non-Financial Preferred Securities Index, holds 131 preferred stocks and it doesn’t skimp on income as highlighted by a 30-day SEC yield of 5.35%.
The $1 billion PFXF is also a relevant idea for investors looking for value in the preferred stock arena.
“The average price of the ICE BofA Fixed Rate Preferred Securities Index is now roughly $96, well below its recent peak of $108 in July 2021. While the price plunge may spook investors that currently hold preferreds, we think the entry point is looking more attractive,” says Collin Martin of Charles Schwab. “Over the last 20 years, the average price of the index has rarely been lower than where it is today. There are two clear outliers: the 2008-2009 financial crisis and the pandemic-induced plunge in March 2020.”
Adding to the PFXF value proposition is an annual expense ratio of 0.40%, putting the VanEck fund 60% below the category average.
There’s something else to consider about preferred’s slow start to 2022. Lower starting prices in this asset class often lead to better long-term returns for investors.
“Historically, a lower starting price translates to a higher total return over the next 12 months,” adds Martin. “The average returns are just that—averages—and they can still fluctuate, sometimes wildly, given the riskier nature of preferred securities. Focusing on the average starting price between $95 and $100, the average forward 52-week total return was close to 9%, but the worst return in that starting range was a 58% loss during the financial crisis.”
Translation: Considering PFXF today could be a more attractive idea than following a lengthy run-up of preferred stocks, which already took place thanks to years of low-interest rates and easy monetary policy.
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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.