Click to Enlarge These wonderful hybrid income instruments carry similarities to both stocks and bonds. Preferred stocks are higher on the capital structure than common shares, and are typically offered by financial companies who favor issuing equity rather than debt. The yields also are often higher than common stocks. However, they carry sensitivity to long-term interest rates due to the inability for dividends to fluctuate, in addition to a specific call or maturity date.
This is a double positive in light of the current equity and interest-rate environment, since both have performed poorly in response to the Fed’s plan. Preferred stocks have given back almost all of the gains they had mustered in 2013.
A great buying opportunity is setting up, and the two ETFs I favor for exposure to this sector are the iShares Preferred Stock ETF (PFF) and the First Trust Preferred Securities and Income ETF (FPE). FPE is an actively managed ETF with higher expenses, and also a more concentrated portfolio.