Preferred stock ETFs may be a compelling opportunity for 2025.
Tailwinds for preferred ETFs this year include deregulation, stable interest rates, and a steepening yield curve. Preferred securities combine features of both equity and fixed income investments, offering the potential for generous monthly income.
Investors have the potential for a high level of tax-advantaged income with preferred ETFs, making them a unique product.
2 Preferred ETFs Worth Consideration
The Invesco Preferred ETF (PGX) is designed for investors looking for both income and capital appreciation. Invesco’s ETF is among the three largest funds in the preferred ETF segment by assets under management, with $4.5 billion in assets.
Over 71% of PGX by weight is in preferreds in the financials sector, according to the fund’s website. Utilities, real estate, and communication services preferreds comprise 10.8%, 7.1%, and 6.8%, respectively, of the fund by weight, as of January 6.
Another option worth consideration is the Invesco Variable Rate Preferred ETF (VRP). This fund provides relatively high yields distributed as qualified dividend income, typically taxed at a lower rate than ordinary income. The fund has lower interest rate sensitivity, making it an interesting option for the current environment.
What Are Preferred Securities?
Preferred securities are often overlooked. However, they may be able to offer attractive tax-advantaged income potential, good credit quality, and diversification benefits.
Preferred stock in a company typically has a higher claim on dividends and assets than common equity shares (but lower than bonds). Similar to bonds, preferred securities offer a specified yield and par value, which limits potential losses.
Preferred stock is primarily issued by banks and other financial companies, but real estate, utilities, and others also issue preferreds.
Preferreds have historically had a volatility profile lower than that of stocks, while being just slightly above that of credit-sensitive high yield bonds.
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