Preferred Stock Investing Guide - Conservative ETFs With More Upside Potential than Bonds
Preferred stock investing is an attractive strategy offering you to benefit from a fixed payment instrument with higher upside potential than bonds.
About Preferred Stock Investing Exchange Traded Funds
Many investors often forget about preferred shares, as an interesting way to get a bit more risk and upwards potential than bonds, yet not totally equal to equity investment. It is a mix of stock and bond, often having characteristics of a convertible bond. Preferred shares are similar to corporate bonds in terms of promise to pay and have higher claim than regular stock holders, yet still behind creditors. On the other side, preferred stocks do not allow you to vote on shareholders meetings. The most beneficial aspect of preferred stocks is dividend, which must be paid out before dividend on regular stocks and is often higher than regular dividend (most often 2 times higher), although not guaranteed.
Not all companies issue preferred shares. When they do, they mark different shares with different sign for each class - A for regular shares and P for preferred shares for example. It is up to investors preferences about which stock class to buy. While preferred shares do not offer such high profit potential as regular shares because of biggest dividend payout, they have advantage over regular shareholders in the event of liquidation. Common shares have voting rights while preferred shares don't. Sometimes preferred shares carry an option to be converted in regular shares sometime in the future - these are called convertible shares.
There are a couple of things to be careful about when picking preferred stocks. First, since they are a hybrid between stocks and bonds, they are more sensitive to interest rate movements than regular stocks. Next, watch for callable option; this is the right of an issuer to call away already issued preferred shares under conditions that are know in-front, which may limit your profit potential. And third, preferred shares are rated by raging agencies similar to bonds and only the change of rating itself can influence stock price significantly.
Probably a more wise approach to preferred stock investing is through Exchange Traded Funds (ETFs), which have a portfolio of preferred stocks. This way the brokerage fees will be much lower since you will buy only one security instead of few, and you won't have to invest in research so much time.
iShares S&P U.S. Preferred Stock Index (PFF) - The iShares S&P U.S. Preferred Stock Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P U.S. Preferred Stock Index.
PowerShares Financial Preferred (PGF) - The PowerShares Financial Preferred Portfolio is based on the Wells Fargo Hybrid and Preferred Securities Financial Index (WHPSF Financial Index). The Fund will normally invest at least 90% of its total assets in preferred securities that comprise the Index. The Index tracks the performance of U.S.-listed securities issued by financial institutions. The Index is rebalanced monthly.
PowerShares Preferred (PGX) - The PowerShares Preferred Portfolio is based on The BofA Merrill Lynch Core Fixed Rate Preferred Securities Index. The Fund will normally invest at least 90% of its total assets in securities that comprise the Index. The Index is designed to replicate the total return of a diversified group of investment-grade preferred securities. (Securities must be investment-grade, based on an average of three leading ratings agencies: Moody's, S&P and Fitch). The Index is rebalanced on a monthly basis.
SPDR Barclays Capital Convertible Secs (CWB) - The SPDR Barclays Capital Convertible Securities ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Barclays Capital U.S. Convertible Bond > $500MM Index, an index that tracks United States convertible bonds with outstanding issue sizes greater than $500 million.
SPDR Wells Fargo Preferred Stock (PSK) - The SPDR Wells Fargo Preferred Stock ETF seeks to replicate as closely as possible, before fees and expenses, the total return of the Wells Fargo Hybrid and Preferred Securities Aggregate Index.
|PFF||iShares S&P U.S. Preferred Stock Index||0.48%||7,020,000|
|PGF||PowerShares Financial Preferred||0.66%||1,430,000|
|CWB||SPDR Barclays Capital Convertible Secs||0.40%||709,400|
|PSK||SPDR Wells Fargo Preferred Stock||0.45%||124,180|
* Assets (Net) are express in thousands of U.S. Dollars. Last update: 12/10/2011
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Written by: Goran Dolenc