Owing to the bond-like characteristics of preferred stocks and the related exchange traded funds, those assets are faltering this year amid rising interest rates, but some green shoots may be emerging.
For example, it’s often said that the higher a bond’s starting yield is when an investor gets involved, the better the odds are of the investor realizing a positive outcome. That sentiment extends to preferred stocks and ETFs such as the VanEck Preferred Securities ex Financials ETF (PFXF).
PFXF, which as its name implies doesn’t hold preferreds issued by traditional financial services firms, currently sports a 30-day SEC yield of 6.67%. That’s toward the higher end of what’s been seen in the roughly 10 and a half years PFXF has been on the market. That could be a sign value is afoot with PFXF and in the broader preferred market.
“The selloff has pushed preferred yields into the 6%-7% neighborhood. And after posting heavy losses, many now trade near or below their issued ‘par’ value. That could be a good entry point, especially if the Federal Reserve acts a bit less hawkish in 2023,” reported Lawrence Strauss for Barron’s.
PFXF, which tracks the ICE Exchange-Listed Fixed & Adjustable Rate Non-Financial Preferred Securities Index, holds 121 preferred stocks — a decent-sized roster when considering the ETF specifically excludes financial services preferreds. That sector has long been the largest issuer of these hybrid securities.
By excluding preferreds issued by financial services companies, PFXF offers investors more diversification than what they find with standard ETFs in this category. However, as highlighted by the aforementioned 30-day SEC yield of 6.67%, investors don’t have to sacrifice income to obtain those diversification benefits. Plus, as hybrid securities, preferreds offer perks beyond what’s found with common equities.
“Preferreds confer benefits that top those of common stock. Investors are entitled to dividends ahead of common stockholders. The securities also sit above common in a company’s capital structure; a preferred owner would have a better shot at recouping capital in a corporate bankruptcy,” according to Barron’s.
As is the case with many high-yield strategies, PFXF’s credit quality is somewhat mixed. That said, about a third of its holdings carry investment-grade ratings, while almost 37% aren’t rated. Fewer than 30% are rated junk, which isn’t an alarmingly high percentage, particularly when considering default rates are low. Additionally, if the Federal Reserve holds off on rate hikes next year, PXFX is a prime example of an ETF that stands to benefit.
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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.
