No Preferred Stocks on Robinhood? No Problem With PREF | ETF Trends

On Monday, popular brokerage app Robinhood, which has risen to notoriety among younger, tech-savvy investors this year, said it will no longer offer some favored income-generating asset classes starting next month.

“Robinhood said that after Jan. 11, 2021, customers can no longer buy closed-end funds, limited partnerships, master limited partnerships (MLPs), royalty trusts, tracking stocks, New York registry shares, and units,” reports Avi Salzman for Barron’s.

In today’s low-yield climate, investors shouldn’t be locked out of accessing preferreds. The Principal Spectrum Preferred Securities Active ETF (NYSEArca: PREF) makes life easier for investors that don’t want to stock pick among individual preferred issues.

Robinhood Aside, PREF Still Matters

Preferred stocks, including those residing in PREF, are hybrid securities due to their combined debt and equity attributes. The securities are senior to common equity and junior to senior debt in the capital structure. They are issued by financial institutions, energy companies, utilities, and telecom companies, among others. Additionally, preferred stocks issue dividends regularly, but investors don’t usually enjoy capital appreciation on par with common shares.

“One analyst wrote in an email to Barron’s that Robinhood’s move to restrict products may be a way to keep investors away from certain complex products out of fear of again running afoul of regulators,” according to Barron’s.

Regardless of Robinhood not offering individual preferred stocks, income investors still have a lot to like with PREF, regardless of what broker they use to access the ETF.

PREF’s active management is another benefit for investors to consider.

Spectrum targets credit quality through a top-down and bottom-up process that scores relative credit quality to reduce credit risk. Spectrum actively manages towards lower aggregate call risk on preferred securities by reducing exposure to overpriced call options that can lead to negative yield horizons. Lastly, they focus on securities with adjustable-rate coupons and high forward reset spreads, where negative convexity is a significantly lesser risk, to help better manage interest rate risk.

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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.