💎 Preferred Stock ETFs
💎 Preferred Stock ETFs
Preferred stocks are hybrid securities — they sit between common stock and bonds. They pay fixed dividends (like bonds) but represent ownership (like stocks). Yields are competitive with high-yield bonds but with different risk characteristics.
How preferred stocks work
| Feature | Preferred | Common | Bonds |
|---|---|---|---|
| Dividends/Interest | Fixed (usually) | Variable | Fixed |
| Bankruptcy priority | Above common, below bonds | Last | First |
| Price sensitivity | Rates + credit | Earnings | Rates |
| Upside potential | Limited | Unlimited | Limited |
The preferred paradox
Preferreds have “worst of both worlds” risk:
- Like bonds: Fall when rates rise
- Like stocks: Fall during credit stress
- Unlike bonds: Dividends can be suspended
- Unlike stocks: Limited upside
ETFs compared
| ETF | Duration | Expense | Best For |
|---|---|---|---|
| PFF | ~5.5 years | 0.45% | Benchmark, liquid |
| PFFD | ~5.2 years | 0.23% | Lower cost |
| PGX | ~5.8 years | 0.50% | IG focus |
| VRP | ~3.5 years | 0.50% | Floating rate |
PFF is the benchmark — $14+ billion AUM, 451 holdings.
Sector concentration warning
Preferreds are heavily concentrated in financials:
| Sector | PFF Weight |
|---|---|
| Banks | ~30% |
| Insurance | ~15% |
| Diversified Financials | ~10% |
| REITs | ~10% |
Financial sector risk: During 2008-09 and 2023 bank stress, preferreds crashed. This is not a diversified income stream.
The 2022-2023 lesson
Preferreds got hit from both sides:
- 2022: Rising rates crushed prices (duration)
- 2023: Regional bank crisis hit financials (credit)
PFF dropped nearly 25% from 2021 highs.
When to consider preferreds
✅ May work when:
- Stable or falling rates
- Healthy financial sector
- You understand financial sector risk
❌ Risky when:
- Rates rising
- Financial sector stress
- You need principal stability
Quick reference
| Goal | ETF |
|---|---|
| Broad preferreds | PFF, PFFD |
| Lower cost | PFFD |
| Investment-grade focus | PGX |
| Rate hedge | VRP |
Preferreds offer attractive yields but concentrated sector risk. They’re not “safe” income — they crashed in 2008, struggled in 2022, and got hit again in 2023’s bank stress.
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