Webinar: The Rare 8% Opportunity in Preferred Securities

Rising interest rates have created a rare opportunity in an under-the-radar corner of the fixed-income market. Preferred securities, a $1 trillion asset class that shares characteristics with stocks and bonds, are offering some of their juiciest yields in years. 

“We’re sitting about 250 basis points higher than the 10-year average yield to maturity for the [preferred stock] index,” James Gearhart, associate portfolio manager at Manulife Investment Management, told me.  

The equates to a yield of nearly 8%. Investors can even get slightly more than that with certain exchange-traded funds, like the John Hancock Preferred Income ETF (JHPI), which Gearhart manages along with Joseph Bozoyan, portfolio manager at Manulife Investment Management. 

Those high yields look particularly attractive given the high-quality characteristics of preferred stocks.  

“Preferreds are typically issued by higher-quality companies with very solid balance sheets,” Gearhart said.  

Low Default Rate on Preferreds

The majority of preferred shares are investment-grade rated, and their long-term default rate is only 0.01%—much lower than the equivalent 2.6% default rate for high yield bonds.  

But even though they have historically been safer than junk bonds, they have tended to generate higher returns. For instance, the total return for preferreds over the past 10 years is over 4%—more than all other categories of fixed income, including high yield bonds, Gearhart said.  

Despite offering the highest yields in many years, investors are understandably nervous about fixed-income securities given the current rising rate environment. In that regard, preferred securities offer advantages over other types of fixed income when it comes to weathering rate increases. 

Preferreds Become "Callable" 

“While preferreds generally have 30+ year maturities— or no maturity date at all— [their] duration is generally lower. That’s because most become callable five or 10 years after they’re issued. [At that time], most preferreds transition to a floating rate,” Gearhart said.  

So, “if rates rise as they have and the security remains outstanding, you will receive higher distributions. Or, [if] the security [is] called away and we get the principal back, we’re able to invest it again in a higher rate environment,” he said. 

Possible Fed Pause  

Preferred securities also have the potential to outperform if interest rates stop going up. For instance, in the year following the last rate hike by the Federal Reserve, preferreds have delivered returns of 14.6% over the next 12 months, based on the average of the past four rate hiking cycles. 

Moreover, the end of rate increases isn’t the only thing that could boost preferreds.  

Manulife’s Bozoyan said that there is an opportunity to move across the preferred market to take advantage of periods of market dislocations. That could provide investors in preferred stock ETFs like his “capital growth in addition to current income.” 

Bozoyan highlighted convertible preferred securities in particular as an area where significant opportunities exist, both during periods of turmoil as well as periods of economic growth.  

To learn more, watch etf.com’s latest webinar, “Diversifying Your Fixed Income Strategy.” 

In this informative webinar, I sit down with Manulife’s Bozoyan and Gearhart to break down everything you need to know about investing in preferred securities, including how active management in the preferred space can lead to superior returns.  

You don’t want to miss it.