Thanks to seven interest rate hikes this year by the Federal Reserve, benchmark borrowing costs in the U.S. reside at the highest levels in 15 years, and a variety of high income asset classes and the related exchange traded funds are tumbling this year.
Preferred stocks and ETFs are certainly among that group. The ICE Exchange-Listed Preferred & Hybrid Securities Index, which is the benchmark tracked by the largest preferred ETF, is lower by 16.16% year-to-date. That’s not far off the 17.90% shed by the S&P 500.
Preferred stocks are considered hybrid securities, meaning they display bond and equity traits. That’s bad news this year because both asset classes are falling – itself a rarity – with aggregate fixed income benchmarks on pace for one of the worst years on record.
Those are undoubtedly gloomy factors, but with signs inflation is easing, the Fed may have the leeway to hold back on rate hikes next year and that could pave the way for rate-sensitive assets to rally. If that happens, the following preferred ETFs could be worth a look by income investors.
SPDR ICE Preferred Securities ETF (PSK)
The SPDR ICE Preferred Securities ETF (PSK) follows the ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index and is more than 13 years old, making it one of the oldest ETFs in this category. The $2.7 billion fund currently yields 5.25%, indicating it could be a compelling choice for income-hungry investors.
Due to the aforementioned rate hikes, plenty of preferred stocks, including some PSK components, are trading at their biggest discounts to par since the 2020 coronavirus market crash. That could be a sign there’s value in this asset class, particularly if rate hikes ease next year.
“Preferreds, therefore, offer a deeply discounted investment-grade-rated yield opportunity that may be able to participate in any risk aversion reversal predicated on any potential policy pivot that tempers central bank aggressiveness,” according to State Street research. “This attractive entry point provides a bit of a backstop and balances the potential risks that the full pivot may not come as soon, or may not be as substantial as many expect.”
VanEck Preferred Securities ex Financials ETF (PFXF)
The VanEck Preferred Securities ex Financials ETF (PFXF) is unique among preferred ETFs in that, as its name implies, it excludes preferred stocks issued by financial services companies. That’s unusual because that sector is the largest issuer of preferred equities.
Despite eschewing preferreds issued by banks, PFXF shares many of the same similarities as its counterparts in this category, including a big yield, value potential and the possibility of a rebound following a rough year. History indicates it could happen.
“Cohen & Steers found that preferred securities often have strong performance after rate hikes, outstripping other types of fixed income products like investment-grade and high-yield bonds,” reports Hannah Zhang for Institutional Investor. “Since 1990, they have achieved an average 12-month return of 12.7 percent after rate hikes, compared to 10.2 percent for investment-grade bonds and 9.9 percent for junk bonds, according to the report.”
Global X Variable Rate Preferred ETF (PFFV)
The Global X Variable Rate Preferred ETF (PFFV) is also unique as it’s one of a small number of ETFs dedicated to variable rate preferred stocks, or those preferreds that are not fixed rate and offer investors the possibility or reduced sensitivity to rising interest rates.
That doesn’t mean variable rate preferreds rise alongside rates. That’s not the case as highlighted by PFFV’s year-to-date decline, but on the other hand, investors need not sacrifice yield to get involved with this ETF as it yields 6.69%.
“We view the interest rate hiking priced in by markets as aggressive and leaves some upside risk to income investors if inflation starts to recede, or if the U.S. Fed believes it needs to slow down on raising rates,” notes Global X. “We have a positive outlook on variable rate preferreds given the attractive yields they now offer as well as a low duration profile.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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