Preferred securities combine features of stocks and bonds, trading on exchanges while providing income similar to bonds. Currently, yields on preferreds are above 6%, outperforming corporate bonds and long-term Treasury yields, as noted by Collin Martin from Schwab Center for Financial Research.
He highlights that while preferreds are sensitive to interest rate changes, their yields are attractive for income-seeking investors, especially since their income may be taxed at lower rates compared to traditional bond interest.
However, Martin advises caution, suggesting that preferreds should complement a diversified portfolio rather than dominate it, and emphasizes the importance of managing concentration risk, particularly in sectors like financials and utilities. He also points to the strength of highly rated banks and financials, which are currently in good shape.
For those looking to invest in preferreds, exchange-traded funds such as the VanEck Preferred Securities ex Financials ETF (PFXF) and the iShares Preferred and Income Securities ETF (PFF) can help mitigate concentration risks, with PFXF showing a total return of about 9% year to date