Best Preferred Stock ETFs

Want to jump straight to the best ETF broker? Check out Interactive Brokers.

Preferred stock rarely get discussed as much as common stock, but thanks to ETFs, investors now trade preferred stock side by side with common stock. Preferred stock is a hybrid financial product that has attributes of both bonds and stocks. Compared to common shares, preferred shares are more stable, but that stability has a few drawbacks.

Best Preferred Stock ETFs of this Year:

  • Best Overall Fund: Innovator ETFS Trust II (EPRF)
  • Best Fund for Low Expenses: Global X US Preferred ETF (PFFD)
  • Best International Fund: iShares International Preferred Stock ETF (IPFF)
  • Best Fund for Yield: Global X SuperIncome Preferred ETF (SPFF)
  • Best Fund for Liquidity: iShares US Preferred ETF (PFF)
  • Best Fund for Diverse Exposure: VanEck Vectors Preferred Securities ex Financials ETF (PFXF)

What are Preferred Stock ETFs?

Preferred stock shares debt and equity characteristics all at once. Like common stock, preferred stock is issued by a company and traded on an exchange. Preferred stock prices can fluctuate, but most of the returns from preferred stock come from dividends. Unlike common stock, preferred stock dividends are predetermined and paid at regular intervals. These dividends are paid in full before any dividends are released to common stockholders. Preferred stock also functions like a bond. A par value is assigned on issue and this price rises or falls, depending on interest rates.

When interest rates go up, the par value of the shares is diminished, just like bonds. Some preferred shares have a maturity date where the investors’ capital is returned, but many do not. Additionally, some preferred shares are callable, meaning the company can decide at any time to repurchase the shares (although usually at a premium). Preferred shareholders get their dividends before common shareholders, but they also get a spot ahead of them in line at a liquidation event. Should the underlying company go bankrupt, bond holders will get paid out first, followed by preferred shareholders. Anything that remains goes to the common shareholders.

Pros of Preferred Stock ETFs

Preferred stock ETFs have many benefits that keep investors interested over common stock trading:

  • Less risk than common stock: Preferred shares are less volatile than common shares and dividend payments are fixed, making them the least risky of the two share classes.
  • Higher dividend yield: Because the dividend paid by preferred stock is set, it’s paid more frequently than common stock dividends and the yield is almost always higher. U.S. Bancorp common shares have a 2.8% dividend yield, but they also have several series of preferred shares with yields over 6%.
  • Predefined dividend not influenced by company profits: When you buy preferred shares, you have a pretty good idea what the investment returns will be. If the company has a bad quarter and lowers guidance, preferred shareholders will still get their agreed-upon dividends.
  • Receive payments before common stockholders: Preferred shareholders are higher up on the food chain than common shareholders, so not only do they receive dividends first, but they get taken care of before common shareholders in a liquidation event.

Cons of Preferred Stock ETFs

Despite the many advantages to preferred stock ETFs, there are also risks to consider:

  • Minimal chance of capital appreciation: No risk, no reward. Preferred stock comes with special perks and it’s dividend yield is pretty much set in stone. Because investors know exactly what they’ll be paid, there’s simply not enough risk to warrant big increases in share price.
  • No voting rights: One of the reasons companies issue preferred stock shares is to raise money without diluting the power of the company’s ownership. Some preferred shares do include forms of voting rights, but most won’t give you a say in business matters.
  • Common stock better in rising interest rate environment: Preferred shares have a par value like bonds, which means interest rates play a large role in determining price. In a rising interest rate environment, the price of preferred shares will drop, making common shares more attractive.

Attributes of Good Preferred Stock ETFs

When looking for the best preferred stock ETFs, here are 3 key elements to keep an eye out for:

  1. Low expenses
  2. High dividend yield
  3. Sufficient liquidity

The Best Preferred Stock ETFs

Using the criteria listed above, Benzinga chose the best preferred stock ETFs in 6 different categories. Low expenses and high yields are obvious prerequisites, but preferred shares don’t have the liquidity of common shares, so consider how easy a fund is to trade when buying preferred stock ETFs.

Best Overall: Innovator ETFS Trust II (EPRF)

This ETF seeks investment results that correspond (before fees and expenses) to the price and yield of the S&P U.S. High Quality Preferred Stock Index. It invests with at least 90% of its total net assets in U.S.-listed preferred stocks that comprise the index. Top holdings include:

  • Aegon NV (AEB), a Netherlands-based life insurance company.
  • Federal Realty Investment Trust (FRT), a REIT focused on shopping centers.
  • AXIS Capital Holdings Ltd (AXS), which provides property, workers compensation, casualty and other types of insurance through subsidiaries.

Its expense ratio is 0.47%.

Best Fund for Low Expenses: Global X U.S. Preferred ETF (PFFD)

The Global X U.S. Preferred ETF (PFFD) invests in a broad basket of U.S. preferred stocks, providing benchmark-like exposure to the asset class. Results correspond generally to the price and yield performance, before fees and expenses, of the ICE BofAML Diversified Core U.S. Preferred Securities Index. Top holdings include:

  • Wells Fargo & Co.
  • Broadcom Inc.
  • Bank of America Corp.
  • GMAC Capital Trust

The expense ratio of PFFD is only 0.23%, while the average preferred stock ETF expense ratio is 0.55%.

Best International Fund: iShares International Preferred Stock ETF (IPFF)

International preferred stock options are limited, mostly because other countries don’t issue preferred shares as frequently as the United States. Investors who want foreign preferred exposure still have the iShares International Preferred Stock ETF, but be cautious of its limitations. 

The 0.55% expense ratio isn’t outrageous, but the fund lacks liquidity. Only $50 million in assets are under management and more than 80% of the fund is comprised of preferred shares from Canada and England. The fund tracks the S&P International Preferred Stock Index and currently has only 102 holdings. U.S. preferred stock ETFs make more sense to own in most environments, but investors looking to diversify outside of America can do so through this fund.

Best Fund for Yield: Global X SuperIncome Preferred ETF (SPFF)

The Global X SuperIncome Preferred ETF is the most expensive on our list, but you’re getting bang for your buck; only the highest quality preferred shares meet the requirements for inclusion here. The fund contains only 50 of the highest yielding preferred stocks from the U.S. and Canada. 

You pay a 0.58% expense ratio for the fund, which remains relatively illiquid with under $200 million in assets and fewer than 90,000 shares traded daily on average. If you’re a buy-and hold-investor seeking the highest yield, this fund might fit best in your portfolio.

Best Fund for Liquidity: iShares US Preferred ETF (PFF)

The iShares U.S. Preferred ETF is one of the older funds in the space (incepted in 2007) and also happens to be the biggest, with over $14 billion in assets under management. Preferred stocks is a thinly traded area, so this kind of liquidity is a boon to institutional investors.

Its 0.46% expense ratio is on the cheap end, but compared to other funds, PFF offers liquidity. Over 3 million shares are traded daily on average, far surpassing all other funds on this list combined. Like other funds, it uses the S&P U.S. Preferred Stock Index as a benchmark and tracks it well thanks to low spreads. All this liquidity makes it a favorite among big investors, who can trade large amounts of PFF cheaply.

Best Fund for Diverse Exposure: VanEck Vectors Preferred Securities ex Financials ETF (PFXF)

If you notice a common theme in preferred stock ETFs, it’s probably that bank shares dominate the holdings. The VanEck Vectors Preferred Securities ex Financials ETF changes that by providing unique exposure to preferred shares, excluding the shares of financial firms. The result is a truly diverse portfolio that doesn’t sacrifice yield or liquidity.

Its 0.41% expense ratio is the second cheapest on our list. The fund has just over $500 million in assets and has a capital appreciation on par with the larger PFF. Excluding financials, extra exposure is give to sectors like energy, real estate, telecommunication and health care (Becton Dickinson preferred shares are its largest holding). Over 150,000 shares trade daily, which gives this fund a great combination of yield and liquidity for investors looking to diversify away from the banks.

Choose Preferred Stock ETFs

Preferred stock is a unique class of share that emulates some aspects of bonds and some of common shares. Preferred shares are usually less risky than common shares, so if you’re  looking for low-risk and (nearly) guaranteed yield, you might like preferred stock ETFs in your portfolio.

Frequently Asked Questions

Q

What is the tax rate for preferred stock ETF dividends?

1
What is the tax rate for preferred stock ETF dividends?
asked
A
1

Preferred stock ETF dividends are taxed as long-term capital gains of 20%.

answered
Q

What are the risks of investing in preferred stock ETFs?

1
What are the risks of investing in preferred stock ETFs?
asked
A
1

The risks include changing interest rates, limited appreciation, slow dividend growth and reduced shareholder voting rights. 

answered