Preferred stocks and the related exchange traded funds are enduring some punishment this year at the hands of the Federal Reserve’s efforts to quash inflation via a series of aggressive interest rate increases.
Those are the breaks for rate-sensitive asset classes and ETFs such as the VanEck Preferred Securities ex Financials ETF (PFXF). On the other hand, rates are still low by historical standards, and with inflation high on a historical basis, income-generating assets are all the more important today. That could augur well for the $1.1 billion PFXF.
“A preferred stock is different from a common stock in that its owner has no voting rights. Preferred stockholders also have preference over common stockholders in the event a company is liquidated. A simplified pecking order in the event of bankruptcy and liquidation is bondholders, then preferred shareholders and then common shareholders,” reported Phillip van Doorn for MarketWatch.
PFXF, which celebrated its tenth birthday in July, follows the ICE Exchange-Listed Fixed & Adjustable Rate Non-Financial Preferred Securities Index. That makes PFXF unique among other ETFs in this category because the bulk of those funds are heavily allocated to the financial services sector.
That makes sense because that group is often the largest issuer of preferred securities, but companies in other sectors can and do issue these hybrid securities. Currently, PFXF allocates over 53% of its weight to preferreds hailing from utilities, real estate, and telecommunications issuers.
Indeed, those are high-dividend sectors when it comes to common stocks, but for investors considering PFXF, it’s worth remembering that companies must tend to their preferred dividends before meeting common equity payouts. The reason for that is because preferred dividend payments are more equivalent to an interest payment on corporate debt. A company that misses one of those payments could be at risk of credit downgrades while sending other alarm signals to investors.
Fortunately for income investors, preferred defaults or missed dividends have been rare in recent years. Adding to the allure of PFXF is that a significant portion of its 123 holdings have strong balance sheets, meaning that those firms have the ability to meet preferred dividend obligations. Additionally, there’s some value in the group because many preferreds are trading at below par values.
“There are many other examples of preferred stocks out there trading at discounts, or for those with higher coupons, trading at premiums you might find reasonable. Ask your investment adviser or call your broker for more information,” according to MarketWatch.
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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.
