Preferred stocks typically don’t even make the podium as it pertains to what investors plan on including in their portfolios. But if you’re an income investor and you don’t already have these stocks on your radar, you’ll want to give preferreds – and specifically, preferred stock ETFs – a look.
You’ll frequently hear preferred stocks referred to as “hybrid” securities. That’s because they carry some elements of common stock (what you typically mean when you say “stock”) and bonds. For instance, preferred stocks represent ownership in a company and trade on exchanges – just like common stock. However, they typically don’t include any voting rights – just like bonds.
But most people who are interested in preferreds are lured in by their dividends. Now, these are also more like bonds’ coupon payments in these dividends are typically set at a fixed amount. But they’re high – sky-high – often in the 5% to 7% range!
Another element preferreds share with bonds is that they trade around a par value. That means while they’re a great source of fixed income, they tend to move calmly, never really swinging drastically higher or lower in any given year. But 2022 was quite the exception, with the main preferred benchmark off 18.1% year-to-date – its worst year since the depths of the Great Recession.
What gives?
“Since preferred securities have long maturities, or no maturities at all, they tend to have high interest-rate risk, or the risk that prices will fall when yields rise,” says Charles Schwab. And in 2022, the Federal Reserve jolted its target Fed funds rate from 0%-0.25% to 3.75%-4.00%, sending high-rate-risk assets including (bonds and preferreds) into the toilet.
But the Federal Reserve signaled in late 2022 that it’s getting ready to start taking its foot off the pedal, bringing renewed hope to preferreds. And while you can easily purchase individual preferred stocks in most standard brokerage accounts and IRAs, we recommend exchange-traded funds (ETFs), which invest in baskets of preferreds, preventing any single preferred-stock disaster from undermining your portfolio.
With that in mind, here are five preferred stock ETFs to buy in 2023.
Data is as of Dec. 2. SEC yield reflects the interest earned for the most recent 30-day period after deducting fund expenses. SEC yield is a standard measure for preferred-stock funds.