Mark Hulbert

Oct. 31, 2020, 11:39 a.m. EDT

The asset class you probably haven’t even considered

It’s not fixed income, but safer than equities and yielding close to 5%

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By Mark Hulbert, MarketWatch

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Upon digging deeper into the data, however, preferred stocks’ performance is less than it seems. For example, when judged by the volatility of returns, the S&P U.S. Preferred Stock Index has been riskier than the S&P 500—10% more, in fact. Since in theory preferred stocks are safer than stocks, it wasn’t supposed to turn out this way. It’s a losing combination to be riskier than the S&P 500 while also producing an inferior return.

Preferred stocks also failed to provide downside protection during the last two major stock market declines, as you can see in the following table.

Total return between October 2007 stock market high and March 2009 low Total return between February 2020 stock market high and March 2020 low
S&P 500 -55.3% -33.8%
S&P U.S. Preferred Stock Index -65.3% -31.0%
iShares Core U.S. Aggregate Bond ETF +7.4% -1.3%

Preferreds’ future

If all you had to go on were these data, then no one would give preferreds a second thought. There are several reasons to nevertheless do so.

One is that there is the distinct possibility that the markets will behave in significantly different ways over the next several years. For one thing, interest rates are unlikely to decline as much as they did over the last couple of decades. On the contrary, the consensus bet is that rates will remain low for the foreseeable future.

It’s furthermore unlikely that the stock market will produce future returns anywhere as close to what they have over the last decade. Equity valuations are already in the overvaluation zone, and stocks won’t be able to count on lower interest rates to support their sky-high valuations.

In such a scenario, preferreds begin to look more attractive. The current yield of the S&P U.S. Preferred Stock index is 4.73%, for example. And, because interest rates are unlikely to decline very much from current levels, it’s unlikely that callable preferreds would be called away. Locking in a nearly-five-percent yield is not a bad prospect.

Exchange-traded funds are the preferred way of getting access to the preferred stock asset class, since they provide instant diversification. The list below shows the five preferred-stock ETFs with the most assets under management:

• iShares Preferred and Income Securities ETF /zigman2/quotes/203128100/composite PFF +0.16% . SEC yield 5.39%

• Invesco Preferred ETF /zigman2/quotes/205250327/composite PGX +0.13% . SEC yield 5.06%.

• First Trust Preferred Securities and Income ETF /zigman2/quotes/206535789/composite FPE +0.21% . SEC yield 5.04%.

• Invesco Financial Preferred ETF /zigman2/quotes/200831949/composite PGF +0.06% . SEC yield 4.87%.

• SPDR Wells Fargo Preferred Stock ETF /zigman2/quotes/206053115/composite PSK +0.26% . SEC yield 4.58%.

But, to repeat the caution from above, the devil is in the details. So by all means discuss the various possibilities with your financial adviser.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com .

/zigman2/quotes/203128100/composite
US : U.S.: Nasdaq
$ 38.36
+0.06 +0.16%
Volume: 1.45M
Jan. 20, 2021 12:02p
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/zigman2/quotes/205250327/composite
US : U.S.: NYSE Arca
$ 15.00
+0.02 +0.13%
Volume: 1.14M
Jan. 20, 2021 12:02p
loading...
/zigman2/quotes/206535789/composite
US : U.S.: NYSE Arca
$ 20.28
+0.04 +0.21%
Volume: 428,645
Jan. 20, 2021 12:00p
loading...
/zigman2/quotes/200831949/composite
US : U.S.: NYSE Arca
$ 18.92
+0.01 +0.06%
Volume: 252,172
Jan. 20, 2021 12:02p
loading...
/zigman2/quotes/206053115/composite
US : U.S.: NYSE Arca
$ 43.72
+0.12 +0.26%
Volume: 62,780
Jan. 20, 2021 11:58a
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Mark Hulbert is a columnist for MarketWatch. His Hulbert Ratings service tracks investment newsletters that pay a flat fee to be audited.

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