Preferred stock ETFs haven’t had the best time through 2022’s selloffs. They’ve lost more than $4 billion in net outflows on a YTD basis, with rising long-term interest rates and widening yield spreads relative to Treasuries — with some down more than long-term Treasury bonds as of May. That has a lot of preferreds available at solid discounts, and they could bounce back next year in an active preferreds ETF like the American Century Quality Preferred ETF (QPFF), if one notable indicator comes good.
That indicator is more of a pattern, but a powerful one — preferreds have offered investors double-digit returns in six out of seven years after a negative total return according to new research from Cohen & Steers.
Add to that the recent softer CPI report suggesting inflation has indeed begun to swing back down, with annual inflation at 7.1% last month compared to 7.7% annual inflation in October. The Fed’s minutes Wednesday saw the central bank drop the pace of its rate hikes to 50 basis points, with targets now hovering around an additional 75 basis point increase into early next year.
Taken together with the discount available for preferreds, investors may want to keep their eye on an active preferreds ETF. QPFF could be a good candidate as investors look to next year, in particular as markets come to terms with the new rate regime.
The ETF actively invests in U.S. and non-U.S. preferred securities of varied maturities, screened based on fundamental and technical metrics like liquidity, credit risk, size, quality, and momentum with a target of 100–200 high-quality preferreds for its holdings. Quality in particular stands out for its investment approach, looking for high-profitability issuers that can keep dividends going in an up-and-down market.
QPFF has added $1 million in net inflows over the last three months, and has outperformed the ETF Database Category Average on both a YTD and a three month basis by 3.5% and 1.8% respectively. Charging 32 basis points, the ETF may be able to play a role for investors next year looking for long term sources of current income.
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