Home etftrends.com Why Preferred Stocks Are Attractive Yet Undercovered

Why Preferred Stocks Are Attractive Yet Undercovered

By Jeremy Schwartz, CFA, Global Head of Research, WisdomTree

Last week’s Behind the Markets podcast featured a discussion with alternative investment manager Moelis Asset Management and its subsidiary Gracie Asset Management. Their investments are focused on opportunities in the credit space, but our conversation focused on the hybrid and preferred stock asset classes as unique opportunities in today’s low interest rate environment.

Some highlights of our discussion—and background information on the asset classes—include the following.

Preferreds: Distinct Market and Structure

  • Broad and Deep Universe: over $1 trillion in preferred stock outstanding, the highest level in history
  • Issuers are primarily regulated, large-capitalization financial institutions in the U.S. and Europe
  • Preferreds provide an investor with the ability to capture both debt- and equity-like characteristics as well as create asymmetric exposures (both long and short) to rates, credit spreads and curve shape with limited need for macro overlays and hedges.
  • Since 2008, banks and brokerage firms have relied on preferred securities to replenish capital that was depleted during the financial crisis. In Europe, the contingent convertible security (CoCo for short) increased from 2% of global capital securities to almost 25% in the past nine years.

The Preferred Market Is Deeply Underserved 

One topic we talked about is why Gracie and Moelis believe the preferred market is underserved by alternative and even traditional managers. Preferreds require specialized knowledge, given the complex and evolving nature of the market. Moreover, there is a coverage gap resulting from the hybrid debt and equity characteristics: many issuers are investment-grade companies with yields that are similar to the high-yield category.

The End of 60/40

  • Investors are grappling with the ineffectiveness of fixed income to provide complementary returns for portfolios that are highly correlated with equities.
  • The typical 60/40 portfolios have traditionally benefitted from declining rates and negative correlation between bond and stock allocations.
  • Preferreds have exhibited low correlations to U.S. Treasuries, a difficult relationship to find in fixed income.
  • Preferreds also provide a relatively high degree of income with less risk and moderate correlation to equities.

For those wanting to learn more about the preferred market, this was a very educational discussion; you can listen to the full conversation below.

Originally published by WisdomTree, 2/9/21


U.S. investors only: Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks.

Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or component of any financial instruments or products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each entity involved in compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties. With respect to this information, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including loss profits) or any other damages (www.msci.com)

Jonathan Steinberg, Jeremy Schwartz, Rick Harper, Christopher Gannatti, Bradley Krom, Tripp Zimmerman, Michael Barrer, Anita Rausch, Kevin Flanagan, Brendan Loftus, Joseph Tenaglia, Jeff Weniger, Matt Wagner, Alejandro Saltiel, Ryan Krystopowicz, Kara Marciscano, Jianing Wu and Brian Manby are registered representatives of Foreside Fund Services, LLC.

 WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only.

You cannot invest directly in an index.

newETFs.io respects the hard work of others and gives all credit to the remarkable folks at ETFTrends.com. This excerpt/article was pulled from their RSS feed; click here to view the original. Please note that on occasion, the RSS feed will not have the author. When this happens this site defaults the author to "News". Make no mistake, this excerpt/article was not created by newETFs.io, it was simply shared with you.