In CNBC’s article, “These high-yielding assets tend to do well in rate cutting cycles. What to know” Michelle Fox quotes strategist Michael Youngworth saying, “Preferreds have logged among the best average returns on a cross-asset basis, trailing only the S&P 500, into the first cut, Though risk-asset returns have typically cooled in the weeks after the first Fed rate cut, preferred still have fared well versus peers, though they underperformed alongside stocks after the first cut of the September 2007 [Global Financial Crisis] cycle (a hard landing).” As investors prepare for the Federal Reserve’s expected first-rate cut, preferred securities are becoming an attractive option for those looking for steady income. These hybrid instruments, blending features of both stocks and bonds, can yield around 6%. Historically, preferred securities often perform well before the Fed lowers rates, especially those with fixed rates and a face value of $25. While returns might ease a bit after the initial rate cut, preferred securities have generally outperformed other asset classes, even during tough times like the Global Financial Crisis.
The appeal of preferred securities lies in their strong income potential and solid credit profiles. UBS highlights several preferred securities with high fixed coupons that are particularly promising, noting their ability to reduce the impact of interest rate and credit spread changes. Examples include fixed-rate preferreds from institutions like J.P. Morgan Chase and Morgan Stanley, which currently offer good yields. Investors should keep an eye on call dates, as issuers can redeem these securities under certain conditions, and preferred securities usually come with higher credit risk than bonds.
For a diversified lucrative approach, exchange-traded funds (ETFs) that focus on preferred securities offer a convenient way to gain exposure. ETFs like the iShares Preferred and Income Securities ETF provide broad coverage with relatively high yields. Despite some drawbacks, such as less upside potential compared to common stocks and a lower priority than bondholders in case of issuer trouble, preferred securities can be a valuable part of income-focused portfolios. When chosen carefully, they can provide consistent income and benefit from rate cuts, making them a strong choice for those expecting a stable economic environment and falling interest rates.
Comments