Preferred Securities ETFs: Steady Income in a Rising Rate World

The hunt for reliable income in a rising rate environment has investors circling preferred securities ETFs, which blend bond-like stability with equity-like yields. But with interest rates poised to remain elevated and macroeconomic risks lurking, how sustainable is this income stream? Let’s dissect the opportunities—and the pitfalls—of these hybrid instruments.

Why Preferreds Still Attract

Preferred securities occupy a unique niche: they pay dividends like stocks but rank higher in priority than common equity, offering a cushion in downturns. The ICE BofA Fixed Rate Preferred Securities Index averaged a 5.5% yield-to-worst in early 2024, far outpacing the 10-year Treasury’s 4.2% yield. This spread, while narrower than its 2023 peak, still rewards investors for taking on incremental risk.

Yet rising rates complicate the picture. Preferreds with long maturities or no call dates face price erosion as rates climb. The VanEck Vectors Preferred Securities Ex-Financials ETF (PFXF), for example, holds securities with an average duration of 10.3 years—a red flag in volatile rate environments.

Recent Performance: Resilience Amid Uncertainty

From January to May 2025, preferred ETFs have been a haven for yield-starved investors. Inflows hit $356 million in January alone, part of a $702 million surge over three months. This momentum reflects two key tailwinds:

1. Stable Rates: The Fed’s pause at 4.5% has reduced immediate volatility, allowing preferreds to trade on fundamentals rather than rate fears.
2. Sector Diversification: ETFs like Invesco Preferred ETF (PGX) (71% financials) and VanEck’s PFXF (26% utilities, 20% telecoms) have insulated investors from sector-specific shocks, such as banking instability or real estate slumps.

The Dividend Sustainability Test

Not all preferreds are created equal. Here’s what investors must scrutinize:

• Cumulative vs. Non-Cumulative: Non-cumulative preferreds (like those in the SPDR Wells Fargo Preferred Stock ETF (PSK)) risk dividend deferrals if issuers face cash crunches. Cumulative preferreds, by contrast, force issuers to pay missed dividends eventually.
• Credit Quality: The average preferred index’s BBB rating leaves it vulnerable to downgrades. The Principal Spectrum Preferred Securities Active ETF (PREF), with 89% BBB-rated holdings, offers stability at a cost: its 4.6% yield trails the sector.
• Sector Exposure: Financials-heavy ETFs like iShares PFF (71% financials) face regulatory headwinds, while InfraCap REIT Preferred ETF (PFFR) (7.2% yield, 23% junk-rated holdings) bets on real estate recovery—a gamble during a potential recession.

The Risks to Watch

The Fed’s “wait-and-see” stance masks deeper risks:
- Rate Cuts vs. Inflation: If the Fed delays cuts to combat stubborn inflation, preferred prices could slump further.
- Credit Spreads: BBB-rated corporates now offer yields just 80 basis points less than preferreds—a historic low. Narrowing spreads could push investors toward safer corporate bonds.
- Sector Volatility: Utilities and telecoms (PFXF’s top holdings) may thrive in a slowdown, but financials and REITs could buckle.

Build a Bulletproof Portfolio

To navigate this landscape, adopt a three-pillar strategy:

1. Core Stability: Allocate to PREF or PGX’s variable-rate cousin, VRP, which shrinks duration risk.
2. Sector Diversification: Pair PFXF (utilities/telecoms) with PFFR (REITs) for balanced exposure—but keep junk-heavy funds like PFFR to a small slice.
3. Tax Efficiency: Prioritize qualified dividends (e.g., PFF and PFXF) to lock in 0-20% tax rates.

Final Verdict: Proceed with Caution

Preferred securities ETFs remain a compelling income play, especially for long-term investors. Their 9.1% 2024 returns and resilience in early 2025 underscore their role in a diversified bond portfolio. Yet with rates near peaks and macro risks rising, this is not the time to overcommit.

Stick to quality-first ETFs, diversify by sector, and avoid chasing the highest yields. In a world of trade-offs, preferreds offer a viable middle ground—but only for those willing to do the homework.

Act now, but act wisely.