Investors may find preferred stock ETFs to be a better-performing option than bonds when interest rates are low. On the other hand, bond ETFs can provide competitive long-term returns, independent of the fluctuations in stock markets. Both types of ETFs can offer a stable source of income to the investor at a minimal cost.
Basics
Investors pursuing prolonged returns find common ground in preferred stocks and corporate bonds. To meet these objectives, today's investors have access to specialized exchange-traded funds (ETFs) dedicated to either preferred stocks or corporate bonds. Deciding between the two hinges on the prevailing economic climate and aligning with your specific investment approach.
For those seeking robust returns, a preferred stock ETF becomes an attractive option, particularly during low-interest rates. The relative security of preferred stock ETFs, surpassing common stock ETFs in quality, ensures a prioritized position for dividends and asset claims over common shareholders. However, it's notable that preferred stock ETFs typically lag behind equity ETFs during bullish market conditions. Conversely, most bond ETFs provide investors with a well-diversified bond portfolio, exceptional liquidity, and cost-effectiveness. Among the bond ETFs discussed below, one has the greatest long-term potential, irrespective of broader stock market fluctuations.
Exploring Preferred Stock ETFs: A Fusion of Stability and Income
Preferred stocks, offering a stability blend akin to bonds and stocks, exhibit non-volatile price movements compared to common stocks. Their allure lies in the reliable dividends they yield, coupled with a perceived safety surpassing that of common stocks, especially in bankruptcy scenarios where preferred shareholders enjoy a more favorable repayment position.
Diversifying your investment portfolio, preferred stock ETFs provide exposure to a spectrum of preferred stocks. Here's a brief overview of two prominent options:
Invesco Preferred ETF (PGX)
- Index Tracked: ICE BofAML Core Plus Fixed Rate Preferred Securities Index (Financials as of Sep. 30, 2023)
- Total Assets: $4.14 billion
- 30-Day Average Volume: 6,084,749
- Expense Ratio: 0.50%
- 12-month Distribution Rate: 7.15%
- Inception Date: Jan. 31, 2008
- 3-Year Performance: -3.98%
iShares US Preferred Stock (PFF) ETF
- Index Tracked: S&P U.S. Preferred Stock Index (Financials as of Sep. 30, 2023)
- Total Assets: $11.89 billion
- 30-Day Average Volume: 5,108,221
- Expense Ratio: 0.46%
- 12-month Trailing Yield: 7.01%
- Inception Date: March 26, 2007
- 3-Year Performance: -0.87%
While the attractive appreciation and high yields of these preferred stock ETFs may tempt investors, it's crucial to note that they may underperform when interest rates rise. Additionally, both exhibited poor performance during the financial crisis, revealing a lack of resilience.
Bond ETFs: Navigating Income Streams and Risk Dynamics
Bonds, essentially corporate loans with regular interest payments, provide investors with a consistent income stream, paralleling the appeal of preferred stocks.
Creditworthiness, evaluated by rating agencies, categorizes bonds into different risk levels. The highest-rated bonds, while offering lower returns, provide enhanced safety, whereas lower-rated bonds present higher risks but yield greater returns. "Junk bonds" carry a significant risk of default by their issuers.
Explore two notable bond ETFs exemplifying diverse risk-reward scenarios:
SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
- Index Tracked: Bloomberg High Yield Very Liquid Index (Financials as of Sep. 30, 2023)
- Total Assets: $5.9 billion
- Average Volume: 7,410,339
- Expense Ratio: 0.40%
- 12-month Yield: 9.73%
- Inception Date: Nov. 28, 2007
- 3-Year Performance: 0.65%
iShares 20+ Year Treasury Bond (TLT)
- Index Tracked: Bloomberg Long U.S. Treasury Index (Financials as of Sep. 30, 2023)
- Total Assets: $39.97 billion
- 30-Day Average Volume: 54,038,652
- Expense Ratio: 0.15%
- 12-month Trailing Yield: 3.78%
- Inception Date: July 22, 2002
- 3-Year Performance: -16.73%
However, caution is warranted as high yields can be misleading. Investors often pursue high yields without fully acknowledging the associated risks, potentially exposing themselves to depreciation. The resilience of TLT shines in its ability to appreciate during challenging market conditions, reflecting a haven for significant capital inflows. It's essential to note that JNK, while a viable option, does not exclusively invest in the highest-quality AAA-rated bonds.
Conclusion
In periods of low-interest rates, preferred stock ETFs allure investors with high yields, yet their appreciation potential lags behind common share ETFs during bullish markets. While bond ETFs generally uphold a reputation for safety, the level of security varies among them. Notably, JNK, despite its high yield, may not be a prudent choice in economic downturns with increased default risks. On the contrary, TLT, though offering a comparatively lower yield, stands out for its resilience and the added benefit of a low expense ratio.