Looking for yield but wary of private credit's illiquidity and lack of transparency? Some investors are turning to preferred-stock funds, which offer better relative yield in an otherwise tight fixed-income market.
Preferreds, often viewed as a hybrid between stocks and bonds, are popular with investors who want stable income and a slightly higher yield than that offered by traditional investment-grade corporate bonds. Historically, the preferred stock usually yields about 1.17 percentage points more than investment-grade bonds.
That remains true: As of July 1, the ICE BofA Investment-Grade Preferred & Hybrid Securities Index had a yield-to-maturity of 6.5%, while the ICE BofA U.S. Corporate Index sat at 5.25%. The ICE BofA U.S. High Yield Index was at 7.45%.
What's unique now is the narrow spread between preferreds and high-yield bonds, says Brian Cordes, head of Cohen & Steers' portfolio specialist group. The latter's one-percentage-point premium over the preferred stock index is well under the 2.19 percentage points of additional yield junk bonds normally offer over preferreds, he says, adding that there's "much better relative value in preferreds," as investors don't need to compromise quality for yields.
While preferreds don't offer the same elevated yields on an absolute basis as private credit or high yield, they offer better transparency and hold investment-grade issues not seen in those markets. Plus, much of preferreds' income is taxed at the lower qualified dividend income rate of up to 20% versus the ordinary income rate, which can run as high as 37% for people in the top tax bracket, Cordes says.
Fundamentals look positive for preferreds, says Doug Baker, a portfolio manager with Nuveen's global fixed-income team, as the main issuers for these investments -- banks, insurers, and utilities -- are strong, and the heightened demand for tax-efficient income should easily absorb the expected $12 billion to $13 billion in new U.S. bank preferred issuance over the next year and a half.
Preferreds are popular with retirees and others looking for enhanced income, and most financial advisors use them as part of a larger fixed-income portfolio, such as David Krakauer, vice president of portfolio management at Mercer Advisors, who maintains a preferred allocation of about 5% to 7%.
Tim Ralph, a managing partner at Merit Financial Advisors, says his firm has recently used preferreds' financial-sector exposure to diversify from the recent volatility in the technology sector stemming from concerns over artificial-intelligence spending.
"We're trying not to be too overweight the AI story," he says. "Preferreds are heavily in the bank area, and a lot of the banks have very strong balance sheets."
It's a sentiment mentioned by other financial advisors, who point to a couple of the biggest preferred stock exchange-traded funds that work as core holdings for low-cost, broad-market exposure, including the $13 billion iShares Preferred & Income Securities ETF, the $3.9 billion Invesco Preferred ETF, and the $2.2 billion Global X U.S. Preferred ETF.
Preferreds have their benefits, but investors need to take a few risk factors into account, Krakauer says. Some funds have long durations, making them sensitive to changes in interest rates and putting them at risk for price drops if the Federal Reserve raises rates.
There are more funds available now with shorter durations, which reduces interest-rate sensitivity risk, such as the $3 billion Invesco Variable Rate Preferred, the $6.4 billion First Trust Preferred Securities & Income, and the relatively new $100 million Goldman Sachs Access U.S. Preferred Stock & Hybrid Securities.
Credit quality is the other main risk investors focus on in preferreds, but Krakauer says there are other hazards with ETFs specifically. The market for preferred stock is more liquid than the one for private credit, but it's smaller and less liquid than that of common stocks or traditional investment-grade bonds.
In times of market stress, bid/ask spreads for preferred-stock ETFs can widen significantly, and prices can fall below net asset value, he says.
"It may be a little tricky to get a good price," Krakauer says. "You might have to give up a good chunk of what you were expecting because of those wider spreads."
Write to editors@barrons.com
To subscribe to Barron's, visit http://www.barrons.com/subscribe
(END) Dow Jones Newswires
July 10, 2026 21:31 ET (01:31 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
