Long-term investors can find solid income in preferred securities, according to UBS. The assets, which have hybrid features of both stocks and bonds, have seen a muted performance so far this year, said Frank Sileo, senior fixed income strategist. Preferreds trade on exchanges like stocks, but also have par values and pay a stream of income. Similar to bonds, when the price of the preferred goes down, its yield moves higher. While spreads are tight, lack of competitive yield alternatives, banking sector fundamentals and supply-demand dynamics should remain supportive of the securities, Sileo said in a note Wednesday. Banks account for an estimated two thirds to three quarters of total preferred issuance , according to S & P Global. “For long-term investors, preferreds can provide high-quality, diverse, and durable portfolio income,” Sileo wrote. Preferreds come in par values of $25 and $1,000, with the former sold to retail investors and the latter aimed at institutions. Many have long maturity dates or are perpetual, but they typically have “call dates,” or points in time when they can be redeemed. UBS recommends investing in both preferred par values. The $25 par preferreds have underperformed so far this year, down 0.6% year to date, versus a 3.5% gain for $1,000 par preferreds, as of June 24, Sileo said. The performance of the lower-priced securities are somewhat more influenced by stock market trends, he noted. “This illustrates the importance of ‘intra-sector diversification,'” Sileo said. “Adding USD 1,000 par preferreds may improve overall risk-adjusted performance by reducing return correlations with other sectors, including common stocks.” Investors can also save on taxes compared to bonds since preferreds typically are taxed at capital gains rates, which are 0%, 15% or 20%, depending on your income. Here are some of Sileo’s top picks in preferred securities in different strategies: conservative, moderate and aggressive. He uses yield-to-worst as a measure of income, which is the lowest estimated annualized yield among potential redemption date scenarios. Investors looking for broad market exposure can invest in exchange-traded funds. For example, the iShares Preferred and Income Securities ETF (PFF) has a 30-day SEC yield of 6.57% and 0.46% expense ratio. The Global X U.S. Preferred ETF (PFFD) has a 6.52% 30-day SEC yield and 0.23% expense ratio. However, the majority of the ETFs are indexed funds with limited or no exposure to $1,000 par preferreds, Sileo noted. “Given the diversity of investment choices within the preferred securities sector and the wide range of preferred ETFs, investors may consider a strategy that uses both single-security recommendations and ETF selections for a more tailored, customized investment solution,” he said.
