Why Retirees Are Quietly Moving Into Preferred Stock ETFs for Bond Like Income at 6 to 9 Percent Yields

Preferred stocks are one corner of the market where I think most retail investors are better off using an ETF rather than buying individual securities directly. That’s not just because ETFs are convenient. Individual preferred shares can be surprisingly complicated.

Many come with features such as call provisions, allowing the issuer to redeem them early if interest rates fall. Others have fixed-to-floating or reset-rate structures, where the dividend changes according to a predetermined formula after several years. There are also differences in credit quality, cumulative versus non-cumulative dividends, perpetual versus fixed maturities, and, above all, many preferred issues simply aren’t very liquid. Buying and selling them isn’t nearly as straightforward as trading common stocks.

An ETF solves many of these problems. Investors receive instant diversification across hundreds of preferred securities, daily portfolio transparency, professional portfolio management, and regular monthly distributions without needing to evaluate each issue individually.

Today, there are dozens of preferred stock ETFs available. Here are three that stand out for different reasons: one is the industry’s default choice thanks to its enormous asset base, another reduces the heavy concentration in financial institutions that dominates the preferred market, and the last prioritizes maximizing monthly income for investors willing to accept additional risk.

iShares Preferred and Income Securities ETF (PFF)

The iShares Preferred and Income Securities ETF (PFF) remains the largest preferred stock ETF on the market, managing approximately $13.17 billion in assets under management. The fund passively tracks the ICE Exchange-Listed Preferred & Hybrid Securities Index, providing exposure to roughly 460 preferred securities.

After deducting its 0.45% expense ratio, PFF currently offers a 6.32% 30-day SEC yield. Historically, it has also exhibited considerably lower volatility than the stock market, with a three-year beta of approximately 0.50, which is half that of the S&P 500 index.

One characteristic investors immediately notice is the fund’s 56.87% allocation to financial institutions.  That concentration exists because banks are among the largest issuers of preferred securities. Preferred stock allows financial institutions to raise regulatory capital without issuing additional common shares and without increasing traditional debt obligations, making it an attractive financing tool. Since most index-based preferred ETFs like PFF weight holdings by market value, the largest issuers naturally dominate the portfolio.

From a credit perspective, approximately 47.02% of PFF’s holdings are investment grade, while roughly 35% are classified as non-rated. That shouldn’t automatically be interpreted as speculative or junk quality. Many preferred securities simply never receive formal ratings despite being issued by large, well-capitalized companies.

VanEck Preferred Securities ex Financials ETF (PFXF)

If you’d rather diversify away from excessive financial sector exposure, the VanEck Preferred Securities ex Financials ETF (PFXF) is worth considering.With approximately $2.43 billion in assets under management and a slightly lower 0.40% expense ratio, PFXF excludes financial issuers entirely.

Instead, the portfolio becomes much more balanced. Electric utilities represent the largest sector at roughly one-quarter of assets, followed by software and information technology, residential and commercial real estate, and aerospace and defense companies.

Credit quality remains similar to the broader preferred market. Just over one-quarter of holdings carry BBB ratings, while more than half are classified as non-rated. Again, non-rated does not automatically imply poor credit quality. Risk remains comparable to PFF as well, with a three-year beta of 0.57, while the fund currently generates a 6.45% 30-day SEC yield.

Virtus InfraCap U.S. Preferred Stock ETF (PFFA)

For investors whose primary objective is maximizing monthly income, the Virtus InfraCap U.S. Preferred Stock ETF (PFFA) deserves consideration with a 8.67% 30-day SEC yield.

Unlike PFF and PFXF, PFFA is actively managed rather than index-based. That flexibility allows managers to avoid one of the biggest pitfalls in preferred investing: negative yield to call.

Negative yield to call occurs when a preferred share trades well above its call price while continuing to offer a relatively modest dividend. If the issuer redeems the security at its lower call value, investors can lose enough principal to offset much or all of the income they collected. Index-based preferred ETFs have to accept this, while active management can sidestep it.

PFFA also has the ability to employ 20% to 30% portfolio leverage. That leverage boosts income when conditions are favorable but magnifies losses when preferred prices decline, particularly during periods of rising interest rates. It’s not a free lunch!

Leverage and active management also increase costs. The fund charges a 0.80% base management fee, while borrowing expenses bring the total expense ratio to  2.11%. Those costs reduce long-term compounding and shouldn’t be ignored.

Even so, PFFA has largely justified its approach so far. Over the past three years, the fund has generated an 11.77% annualized total return, comfortably ahead of the S&P U.S. Preferred Stock Index’s 6.61% over the same period.

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