These days, fixed-income investors are facing tough decisions. Yields are plentiful with a wide range of bonds and other fixed-income assets yielding levels not seen in over a decade. But those high yields come with enhanced risks. Volatility has returned to the bond markets, while the constant threat of inflation and recession risk is real. Defaults have the potential to grow, and even Treasuries have had their safety come into question. It’s a tough nut to crack for sure.
But there could be one fixed-income asset class that is poised to meet these challenges head-on.
Staid preferred stock could be just what investors are looking for in the current environment. High yields, low duration, and strong credit quality are key hallmarks of the sector. And with excellent long-term historical returns, preferred stock could be what investors need to get them through the current tough fixed-income environment.
Fixed-Income Challenges
Bonds are supposed to be the “simple” asset class to own. You lend money to an entity, sit back and collect your interest, and then, at the end, you receive your money back. But lately, the normally staid bond market has been fraught with plenty of volatility.
That’s because the economy is stuck within this not-quite-bullish, not-quite-bearish market environment. For example, inflation has moderated from its peaks. But it hasn’t gone away completely and has recently started to tick higher. This has prevented the Federal Reserve from cutting rates further.
This issue has been compounded further by the mixed economy. Data suggest the economy has been slowing. The continued tariff policies have the potential to slow this further, but at the same time, be even more inflationary.
And speaking of tariffs, President Trump’s policies have reset global trade, and analysts have started to question the position of the United States as the world’s leading superpower. Rising debt levels have continued to push up yields in super-safe Treasuries, again, making the Fed’s job even harder.
For a wide range of fixed-income asset classes, this has added additional risks to the equation. Junk bonds and senior loans may see higher defaults, Treasuries have increased their volatility and correlations with equities, and even municipal bonds have started to feel the pinch.
A Preferred Choice
But there could be an asset class that can help turn the tide against the fixed-income malaise, offering comfort and the ability to fight against many of the issues plaguing the sector. That would be preferred stock.
If you remember, preferred stock is considered a hybrid security, straddling the line between equity and debt. On the bond side, preferred stock is issued with a par value that is returned to investors once the preferred stock matures/is called and features steady dividends through a coupon payment. On the stock side, preferred stock represents an equity stake. When there’s a problem, preferred stockholders get paid first in instances of bankruptcy over common shareholders. Another added feature is that, if a firm stops paying dividends for some reason, preferred stockholders must be paid first before common stockholders, and in some cases, they may also be required to receive back all suspended dividends.
These unique attributes are precisely why preferred stock could be a great bet in the current environment.
For starters, their yields are some of the highest around for the credit quality. With economic risks rising, taking on additional credit risks to get a higher yield may not be worth the effort and may result in potential losses/defaults. But because a firm’s bonds have priority over preferred shares in the bankruptcy ladder, the dividend rate is often higher on preferred stock than on its issued bonds. Today, the ICE BofA Diversified Core U.S. Preferred Index has a yield to worst (YTW) of 7.4%. That’s slightly higher than junk bonds.
The kicker is that the bulk of the preferred market is supplied by investment-grade issuers. This chart from Nuveen highlights that the majority of preferred issuers have credit ratings in the AA, A, and BBB investment-grade ratings. 1
Source: Nuveen
Ultimately, preferreds allow investors to have a high yield while maintaining a very high standard of credit quality within their portfolios.
Preferreds can also help on another front, and that’s interest rate risk. Duration is a measurement of a bond’s interest rate risk that also considers factors like a bond’s maturity, yield, coupon, and call features. Duration can be used to figure out how much a bond will fall when rates rise, and vice versa. Those bonds with longer durations fall more than those with shorter durations when rates rise.
But preferred stocks are interesting. Many have long timelines, such as 30 years, or even into perpetuity. However, the callability feature helps reduce their duration significantly, pushing many longer-term preferred stocks into intermediate- or short-term bond levels of duration.
Given the uncertain environment, there is plenty of uncertainty surrounding the Fed’s policy, fears of inflation, and the state of the economy. Reducing duration risk could be a smart bet no matter what the central bank decides to do.
Preferred stock also helps on two other current fixed-income risks as well — volatility and taxes. Volatility has risen in recent weeks, but the historical median rolling 36-month standard deviation of returns over the last 15 years for preferred stocks is just 6.34%. That’s below both equities and junk bonds. As for taxes, the risk of higher taxes is real. However, dividends from the bulk of the preferred sector count toward the lower tax treatment of qualified dividends.
Making Preferred Stock a Dedicated Allocation
To be blunt, investors need to do something about the rising risks in the fixed-income sector. Preferred stock could be that answer. Their unique attributes provide them with ways to fight many of the growing risks within the bond market. With that, adding them as a dedicated holding makes sense.
This is one instance where buying them individually may be a non-starter. Most preferred stocks trade on the over-the-counter bulletin board (OTCBB), which leads to wide bid-ask spreads or very low volumes. At the same time, most preferred stockholders — insurance companies, endowments, big institutional investors, etc. — tend to buy them and hold them until they mature.
To that end, ETFs and broad funds may make sense. Luckily, there are enough passive and active choices in the sector.
Preferred Stock ETFs
These funds are selected based on their ability to tap into preferred stock and their assets under management. They are sorted by their YTD total return, which ranges from -3% to 0.8%. Their expense ratio ranges from 0.23% to 0.85%, while they have AUM between $1B and $6B. They are yielding between 4.6% and 9.9%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| PREF | Principal Spectrum Preferred Securities Active ETF | $1.11B | 0.8% | 4.6% | 0.55% | ETF | Yes |
| FPE | First Trust Preferred Securities & Income ETF | $5.88B | -0.1% | 5.4% | 0.85% | ETF | Yes |
| PGX | Invesco Preferred ETF | $4.31B | -2% | 5.9% | 0.51% | ETF | No |
| PFF | iShares Preferred & Income Securities ETF | $14.8B | -2.2% | 6.8% | 0.46% | ETF | No |
| PFFD | Global X U.S. Preferred ETF | $2.36B | -2.2% | 6.48% | 0.23% | ETF | No |
| PFXF | VanEck Preferred Securities ex Financials ETF | $1.93B | -3% | 9.9% | 0.40% | ETF | No |
In the end, fixed-income investors are facing a challenging environment. Rising inflationary risk, duration risk, and economic risk abound. Preferred stock could be the solution to navigating these issues. Thanks to its unique attributes, preferred stock can fight many of the problems facing investors today, all while producing a very high yield.
Bottom Line
For investors, the market and global economic environment are becoming increasingly challenging, with numerous conflicting risk factors. Only preferred stock can help on all the various risk fronts to deliver strong returns in this environment. Investors should consider the asset class for their portfolios.
1 Nuveen (December 2025). Fixed income perspective, preferred securities
