In the latest episode of “ETF 360,” VettaFi head of research Todd Rosenbluth spoke to PIMCO’s head portfolio manager for PRFD, Phillipe Bodereau and portfolio manager Amit Arora, live on the floor of the New York Stock Exchange. Preferred securities are an often-overlooked corner of the market, but the recently launched PIMCO Preferred & Capital Securities Active ETF (PRFD) could offer investors exposure to this unique asset class in a convenient ETF wrapper.
“The first angle of the product is that this is an asset class where we’ve seen some very clear improvements in the underlying quality of the issuers in the last 10 years,” Bodereau said, praising preferreds as a tax-efficient tool for investors. Preferreds also benefit from ease of trade and can generate strong amounts of income, according to Bodereau.
Discussing how preferreds weathered 2022’s uniquely challenging markets, Arora said that preferreds were not immune but noted, “certain parts of the preferred markets actually performed much better than more interest rate-sensitive assets.” Arora also shared that, coming into 2023, valuations for preferreds were attractive and yields were high. “Year-to-date, we’ve seen some good tailwind in the product,” he said.
The actively managed PRFD could very well have launched at an opportune time, given the valuations and tailwinds. Given how much of a specialized niche preferreds are, Bodereau spoke to the process of managing the fund. “We spend a lot of time selecting the issuers, building on our macro views.” PFRD invests in both U.S. and non-U.S. banks as well as insurance companies, energy companies, and utilities. Bodereau added that, looking at the broad picture, they ask, “What’s the best slice of the capital structure we want to be invested in, and which bank in itself makes the most sense?” Currently, he noted that PRFD is taking a cautious approach to institutions that have a lot of exposure to subprime lending, given the potential for recession.
“ETF as a wrapper is the perfect product for allocating to actively managed diversified preferreds,” Arora said. The ease of use, liquidity, and tax efficiency are the three main reasons that an ETF wrapper is particularly suited for this product, according to Arora.
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