3 Best Preferred Stock ETFs

Today we are going to break down the 3 best preferred stock ETFs. They are:

Each have a slightly different style to them. So ideally you should find the right one for you from this list.

Let’s get to it!

Table of Contents

What is a Preferred Stock?

Preferred stock is somewhere between a common stock and debt on the spectrum of capital in a company. In terms of priority in payments/liquidation, preferred stock comes after debt but before common shareholders. So think of them as riskier than bonds, but less risky than common stock.

As preferred stock are above common stock in terms of liquidation preference, they (generally) have income characteristics like a bond. They generally have a face value as well as some level of distribution (dividend). These distributions can be fixed or variable based on interest rate fluctuations.

A key distinction from bonds is that preferred share distributions are NOT tax deductible.

Preferred stock can trade just like a stock and can trade at a discount or premium to its face value.

In practice, preferred shares act much more like bonds than common stock. Therefore, many investors use them for income like bonds. However, these are significantly riskier than bonds, thus bringing higher yields.

What is a Preferred Stock ETF?

A preferred stock ETF simply invests in preferred stock that is (generally) publicly tradable. Most tend to follow an index and this helps keep expense ratios down.

However, as these are highly specialized financial products vs. common stock and bond ETFs, you can expect higher expense ratios.

Below are my three picks for preferred stock ETFs if you’re looking for some exposure to preferred stock.

iShares Preferred and Income Securities ETF – PFF

Net Assets: 13.66bn

Expense Ratio: 0.46%

Distribution Yield (TTM): 6.54%

PFF is, in my opinion, the best all-around ETF for exposure to preferred stock. It invests in preferred stock issued across US companies which are generally high in credit rating.

It doesn’t do anything fancy, and because of that it boasts a (relatively) reasonable 0.46% expense ratio.

This ETF is perfect for someone looking for a simple entry into preferred stock.

VanEck Preferred Securities ex Financials ETF – PFXF

Net Assets: 1.38bn

Expense Ratio: 0.41%

Distribution Yield (TTM): 7.19%

PFXF is essentially PFF from above, but it EXCLUDES financial institutions. Preferred stock issuances are popular with banks, etc. So by investing in preferred stock, you are carrying a more concentrated exposure to financial institutions.

PFXF alleviates any concerns with the banking sector but excluding them completely. This has historically kept yields higher, but brings a slightly higher level of risk.

Even though the math is showing that banks are less risky that on other preferred stock issuers, that may not stay the same. In 2008, many preferred shares were made worthless by failing banks.

On the other hand, keeping financial institutions in the picture helps diversify from the other two major industries that use preferred shares: utilities and real estate.

All in all, this fund is great for an investor looking for preferred stock exposure outside of the banking industry.

Invesco Variable Rate Preferred ETF – VRP

Net Assets: 1.49bn

Expense Ratio: 0.50%

Distribution Yield (TTM): 7.00%

Last up we have VRP. VRP is essentially PFF, but with preferred stock that only has VARIABLE distributions. This means two things:

First, it lowers your interest rate risk. As interest rates go up, the price of preferred stock goes down. And vice versa. With variable rate preferred stock, your distributions follow the market more closely.

Second, due to this added benefit of variable rates, your dividend yield is generally lower over time. Variable interest rates are a benefit to the lender (i.e. you!). This means that, over time, you are giving up yield in the form of safety.

So while it has a higher twelve month yield than PFF and PFXF, this is only due to recent interest rate fluctuations.

This ETF is great for an investor looking for preferred stock exposure, but less interest rate risk.

Bottom Line

We’ve now gone through the 3 best preferred stock ETFs. They are:

Each provides a different flare for different investment strategies. So hopefully you’ve found one that has piqued your interest! Happy hunting!

DISCLAIMER – THIS ARTICLE IS NOT FINANCIAL ADVICE. THIS ARTICLE DOES NOT CONSTITUTE A BUY, SELL, OR HOLD RECOMMENDATION ON ANY SECURITY MENTIONED HERE. THIS ARTICLE CONSTITUTES MY OPINION AND NOT A STATEMENT OF FACT. ALL INFORMATION REGARDING THE FINANCIAL SECURITIES MENTIONED IS ACCURATE AS OF JANUARY 23, 2024. DO YOUR OWN RESEARCH.

What is a Preferred Stock?

What is a Preferred Stock ETF?