In an ultra-low yield environment, income investors often need to go beyond bonds and common stocks. Asset classes to embrace include preferred stocks, accessible via exchange traded funds like the Global X U.S. Preferred ETF (Cboe: PFFD).
PFFD, which debuted in September 2017, tracks the ICE BofAML Diversified Core U.S. Preferred Securities Index.
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 on a regular basis, but investors don’t usually enjoy capital appreciation on par with common shares.
Preferreds are considered alternative investments and one of the better income generators in that group.
Why Go the Preferred Route?
Income investors have looked to preferred stock ETFs in their portfolios for a number of 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.
While investors can own individual preferreds or actively managed funds addressing the asset class, there are some benefits to the passive ETF wrapper. PFFD can act as a portfolio diversification tool and reducer of correlations.
See also: Active Management and the Preferred Stock ETF Space
PFFD is often a better way to gain attractive yields than investing in government bonds, which offer much lower yields for the amount of potential risk investors face.
For more on income strategies, visit our Retirement Income Channel.