Do Preferred Stock ETFs Belong In Your Portfolio? [iShares S&P US Pref Stock Idx Fnd (ETF), PowerShares Preferred Portfolio(ETF)]

ETFsMarkets have seen a soft start to the year, thanks to concerns related to economic recovery and emerging markets. Though major indices recovered last week, they have failed to deliver positive returns so far since the start of the year.

The Fed has trimmed asset purchases twice since December last year. Though the gradual withdrawal of monetary stimulus is definitely a matter of concern, unsupportive economic data including two months of back to back weak U.S. job growth is making investors jittery about the rosy picture projected earlier.

Also, an uninspiring earnings outlook from most of the companies for this year has added to the woes, making investors believe that last year’s party is now over and the markets are due for some correction now.

Not only are things unpleasant here, China, the world’s second largest economy, is currently faced with a shadowy financial market and concerns related to growth. (read: China ETFs Struggle on Weak Data, Bailout Speculation)

Also, the axe on stimulus has not spared the emerging markets. These countries are witnessing an outflow of cheap foreign money, causing their currencies to see the worst fall in five years.

Interest Rates Plunging

Surprisingly, the turmoil in the emerging markets has led to a dip in U.S. interest rates, even in the face of the Fed taper. Investors in emerging market nations are fleeing their risky securities for safe haven U.S. T-Bills. This massive surge in demand for safe haven investments has sent interest rates southward. In fact, the rates on the benchmark 10-year government bond have fallen to 2.7%, 30 basis points lower than the rate seen at the beginning of January.

Rock bottom interest rates have precipitated demand for high yielding investment avenues. Though there are quite a few options, the current combination of falling rates and higher equity risks makes investing in preferred stocks as one of the most favored spots.

Preferred Stock ETFs in Focus 

Not only do the preferred stocks offer considerably higher yields, they also provide an opportunity for capital appreciation. They are hybrid securities having the characteristics of both debt and equity. The preferred stocks pay the stockholders a fixed, agreed-upon dividend at regular intervals, like bonds.

Preferred stocks are thus quite stable and generally have a low correlation with other income generating segments of the market like REITs, MLPs, corporate bonds and TIPs.

Though investors can buy individual companies’ preferred stocks, buying preferred stock ETFs can be a very convenient way to invest in a basket of diversified companies at a low cost.

Below we have highlighted three ETFs, which not only offer substantial yields but also provide good opportunity for capital appreciation. 

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