Time For Preferred ETFs?

Markets have seen a wild start to the New Year, thanks to concerns related to the trading halt in China following the introduction of a new circuit breaker and cut in ties between Saudi Arabia and Iran. All major indices were in the red with more pains lurking ahead.

The Fed has already enacted a rate hike in December. Though gradual policy tightening is definitely a cause of concern, an unaccommodating global market backdrop led many investors to doubt the Fed’s ability of being steadfast in hiking key rates throughout 2016.

Also, a lackluster earnings outlook for the fourth quarter of 2015 has made the matter worse, making investors apprehensive that last year’s gloom is not over yet and that the market may see a replay of the 2015 sell-off, at least in the early phase of 2016.
 
Meanwhile, a flight to safety brought down the long-term U.S. treasury yields, even after the Fed lift-off. Investors are fleeing their risky securities for safe haven U.S. treasury bills. This unprecedented surge in demand for safe haven investments sent interest rates southward in recent sessions (read: Can Flight to Safety Save These Treasury Bond ETFs?).
 
Still-contained interest rates despite the Fed rate hike increased demand for high yielding investment avenues. Though there are quite a few options, the current combination of relatively lower rates and higher equity risks makes investing in preferred stocks one of the most favored practices.
 
Investors should note that even if rates rise in the future on the Fed’s continued policy tightening stance, many will still be looking for benchmark-beating yields and decent capital appreciation. For them, preferred equities and the related ETFs could be a great tool.

What is a Preferred Stock?

A preferred stock is a hybrid security that has characteristics of both debt and equity. These do not have voting rights but a higher claim on assets than common stock (Complete Guide to Preferred Stock ETF Investing).

That means that dividends to preferred stock holders must be paid before any dividend is paid to the common stock holders. And in the event of bankruptcy, preferred stock holders’ claims are senior to common stockholders’ claims, but junior to the claims of the bondholders.

The preferred stocks pay the stockholders a fixed, agreed-upon dividend at regular intervals, like bonds. Most preferred dividends have the same tax advantage that the common stock dividends currently have.