How Preferred Securities Can Offer Attractive Yield and Risk Management | ETF Trends

With the fixed income market environment still choppy, investors are looking for ways to diversify their yield-generation capabilities. Alternative income strategies, such as preferred stocks, offer consistent income and can help manage risk.

In the upcoming webcast, How Preferred Securities can offer attractive yield and risk management, Seema Shah, managing director and chief strategist at Principal Global Investors; Matthew Cohen, head of ETF specialist team at Principal Global Investors; and James Hodapp, senior vice president and portfolio specialist at Spectrum Asset Management, will highlight the benefits of incorporating preferred securities into a traditional income portfolio.

For example, the Principal Spectrum Preferred Securities Active ETF (NYSEArca: PREF) can act as a portfolio diversification tool and correlation reducer. Another advantage of PREF’s active management is that the managers can take advantage of value opportunities in an asset class that has been expanded over the past few years. Lack of constraint to an index is a relevant advantage because PREF’s managers can eschew issuers with shaky financial profiles while focusing on those most likely to make good on dividend payments.

PREF has a “dedicated exposure to $1,000 par preferred securities, designed to offer attractive yields, diversification benefits, and reduced risk compared to other fixed income securities,” according to Principal

“Fixed-to-float and fixed-to-variable securities may offer higher back-end spreads that may result in increased coupons to help manage interest rate risk.”

Preferred stocks are a type of hybrid security that shows bond- and equity-like characteristics. The shares are issued by financial institutions, utilities, and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds. Additionally, preferred stocks issue dividends regularly, but investors don’t usually enjoy capital appreciation on par with common shares.

Income investors have looked to preferred stock ETFs in their portfolios for several reasons. 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.

Financial advisors who are interested in learning more about preferred securities can register for the Wednesday, September 21 webcast here.