A Preferred ETF Strategy to Hone in on Income

Markets ETF Trends

Investors seeking additional yields in a low-rate environment may consider alternative income strategies, like preferred securities and related exchange traded funds, to generate a little extra on returns.

Continue Reading Below

On the upcoming webcast, Hone in on Income with this ETF Preferred Strategy, Channing Smith, Managing Director at Capital Advisors, Jason Jones, Director and Preferreds Strategist at Wells Fargo Securities, and Fran Rodilosso, Head of Fixed Income ETF Portfolio Management at VanEck, will focus on attractive options in the preferred securities market segment.

For instance, the VanEck Vectors Preferred Securities ex Financials ETF (NYSEArca: PFXF) has been one of the best performing preferred securities-related ETFs of 2016, rising 11.1% year-to-date.

Moreover, PFXF has generated an attractive 5.62% 12-month yield.

The preferred securities has been a popular alternative to traditional stocks and bonds. 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.

Continue Reading Below

The assets are a type of hybrid security that show 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.

SEE MORE: Preferred Stock ETFs for a Low-Yield Environment

However, about two-thirds of preferred securities are made up of traditional financial companies, including banks, which have largely unperformed this year.

PFXF, though, specifically excludes financial sector exposure. The preferred securities ex-financial ETF, though, does include a hefty 30.6% tilt toward real estate investment trusts, along with 22.6% electric companies, 16.2% telecom, 4.9% agriculture, 4.2% insurance, 4.1% manufacturing,  3.6% pipelines, 3.3% oil & gas, 2.0% food and 1.9% healthcare.

Potential investors should also be aware of the risks in a rising rate environment. Looking ahead, while preferred stocks provide investors with an attractive source of yields, the assets are vulnerable in a rising interest rate environment. If rates rise, the holdings will likely decline in price to elevate their yield to attractive levels.

Financial advisors who are interested in learning more about preferred securities can register for the Thursday, October 6 webcast here.

This article was provided by our partners at ETFTrends.