Income generating ETFs remain popular given the market uncertainty and volatility of the last two years. While income investors do not lack choices, preferred securities are a type of “hybrid” investment that shares characteristics of both stocks and bonds. The Fidelity Preferred Securities & Income ETF (FPFD), which just established its three-year track record, is a fund worth considering.
Preferred securities differ from common stocks in several ways. In the event of a company’s liquidation, preferred securities are typically paid out after bondholders but before common stocks. Preferred shareholders also receive higher priority for dividend payments than common stockholders and the dividends may offer higher yields than those of common stocks or traditional fixed income securities, such as investment-grade corporate bonds.
Unlike common stocks, investors in preferred stocks are generally not entitled to voting rights.
Combining Stock and Bond Benefits in One Security
Preferred securities carry attributes of both debt and equity in one asset type. Regular income payments with the potential of higher yields when rates rise and capital appreciation allow investors to capture the attractiveness of stocks and bonds in a single security.
Preferred securities can come in different structures. Equity preferreds, or preferred stock, are the most traditional type of preferred security. This type ranks above common stock but below debt in the capital structure of the issuing company. Preferred stock has a fixed par value and pays a dividend. The dividend may be suspended at any time, but the company is required to halt dividends on common shares first.
Debt preferred securities, such as junior subordinated debentures, typically rank below an issuer’s senior unsecured debt, but above preferred stock. This type of preferred security makes regular interest payments that may be deferred and can be cumulative or non-cumulative. Deferred payments on cumulative preferreds must be paid back while non-cumulative preferreds do not. The non-cumulative feature typically demands a higher yield to investors.
Preferred Stock Investing With FPFD
The Fidelity Preferred Securities & Income ETF (FPFD) is actively managed and seeks current income and capital appreciation. It does so by investing across all types of preferred securities. The fund strives to provide income with low correlation to traditional investment grade bonds and equity diversification with lower volatility than common stocks.
Since most issuers in the preferred securities market have a credit rating of BBB or BB, strong fundamental research is key to success in this space. The fund’s managers utilize fundamental analysis and rely heavily on Fidelity’s High Income Research Team to evaluate each issuer’s financial condition as well as general market and economic conditions.
FPFD launched three years ago on June 15, 2021, just six months ahead of one of the worst years for stocks and bonds in decades. Since the fund’s launch, FPFD generated total returns of -1.85% as of 06/03/2024, according to Y-Charts data. For comparison, income investors in broad bonds via the Bloomberg U.S. Aggregate Bond Index experienced total return losses of 8.84% over the same period.
In the last year, FPFD generated total returns of 9.03% as of 04/30/2024 according to the issuer’s website. For comparison, the ICE BofA US All Capital Securities Index generated total returns of 8.58% over the same period.
FPFD has a net expense ratio of 0.59%.
For more news, information, and strategy, visit the ETF Investing Channel.
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