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The Pros and Cons of Preferreds (PFF, HYG)


The Pros and Cons of Preferreds (PFF, HYG)
Russ Koesterich: Given the universal hunt for yield, many investors are asking me what I think of preferred stocks.
I believe that this asset class certainly has a place in yield oriented portfolios, but I wouldn’t overweight preferred equity funds at this time and would instead remain neutral. Why? While preferred funds are certainly providing a healthy, relatively high yield in a low yield environment, the extra yield comes with a lot of volatility.
Currently, preferred funds are offering a yield similar to that of a high yield bond fund, but preferred funds are also offering about 50% more volatility. For instance, the yield on the iShares S&P U.S. Preferred Stock Index Fund (NYSEARCA:PFF) is now approximately 6.5%, roughly in line with the yield of the iShares iBoxx $ High Yield Corporate Bond Fund (NYSEARCA:HYG). But at the same time, PFF’s three-year trailing volatility is more than 15% compared with less than 10% f ....

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