Sorting Through Preferred Stocks

Preferred stocks provide above-average income with no more risk than long-term treasury bonds or stocks. One way to invest in preferreds is through an exchange-traded fund. But there are details about preferred stock ETFs that many people don’t know, and the preferred stock ETFs are not the same. Barron’s this week has a good, brief explanation of the risks and the differences between the ETFs.

For those who don’t have access to the article, there’s a change underway in the preferred stock market. The high-yielding trust-preferred securities no longer count as Tier 1 capital for banks, so they’re steadily redeeming them and replacing them with other securities. The new securities tend to have comparable yields, but they generally don’t give investors as much protection in case of financial troubles as the old securities.

Investors also should know that the preferred ETFs are heavily invested in banks. The iShares S&P Preferred Stock Index (PFF) is about 75% invested in financial stocks, primarily banks and insurers. That’s why I prefer the open-end fund Cohen & Steers Preferred Securities & Income. It’s actively managed instead of having to follow an index. It’s more diverse among sectors, and it also buy securities outside the U.S.