by Jessie Symanski, iShares
Hi there. I’m Jessie Szymanski, the newest guest contributor for the iShares Blog.
My job is all about making your life easier. I mean, I won’t do your laundry, but my role at iShares is to make your investments easier to understand and easier to implement. As a Messaging and Communications Strategist, I write about anything from new products to investment strategies to the essentials of fixed income ETFs.
So I thought I’d take my mission of making your life easier to the (blog) streets, starting with a topic we’ve been hearing a lot about lately: preferred stock.
Preferreds are attracting a lot of attention now for two reasons. First, a persistently low interest rate environment has pushed many investors to seek yield in places other than fixed income. Preferreds are subordinate to bonds, but senior to common stock. That means that they generally offer higher yields than bonds, but less return potential than common stock. They’re often referred to as “hybrid” securities because they offer some characteristics of bonds and some characteristics of common stocks.
The second reason for the recent focus on preferreds is that a provision of the Dodd-Frank Act may affect the way that US banks classify their preferred offerings. (The majority of preferred securities are issued by financial companies.) So investors who traditionally look to the United States for preferreds have started to look internationally.
What’s interesting about the international preferred market is that it’s dominated by Canada. Fully 73% of the iShares S&P International Preferred Stock Index Fund (IPFF) is dedicated to Canadian securities.
Why is that important? Three reasons:
- Canadian banks are strong. Some investors shy away from US preferreds because they’re typically issued by financial companies (and are then linked to sometimes-shaky US banks). According to a recent World Economic Forum study on 150+ countries, Canada’s banking system was the most sound of them all (the United States ranked #111). While the United States relaxed underwriting standards a few years back, Canada did not, so Canadian bank balances sheets are seen as stronger.
- Investors can diversify internationally, without those pesky PIIGS. You might be worried about a little something called the continent of Europe. While IPFF has exposure to the UK and Sweden, it’s dominated by Canada and has no exposure to the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), Germany or France. The result? Investors can use IPFF to diversify internationally, without undue exposure to the most problematic European countries.
- Potential for additional income versus common stock. Because IPFF consists of preferred stock, it offers the potential for additional income versus Canadian common stock (but lower return potential). For investors who prioritize income, the difference in yield (5.36% for IPFF’s index as of May 31 versus 3.11% for broad Canadian common stock, as measured by the MSCI Canada Index) may be worth a closer look.
Income-seeking investors can consider IPFF an interesting alternative to common stocks, or a natural complement to traditional preferred stock investments.
How else can I make your life easier? What investment-related concerns are keeping you up at night? Comment below and I’ll answer your other questions.
Now if I could only get someone to do my laundry….
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Securities focusing on a single country may be subject to higher volatility. Narrowly focused investments typically exhibit higher volatility. Preferred stocks are not necessarily correlated with securities markets generally. Rising interest rates may cause the value of the Fund’s investments to decline significantly. Payment of dividends is not guaranteed. Removal of stocks from the index due to maturity, redemption, call features or conversion may cause a decrease in the yield of the index and the Fund.
Index returns and yield are for illustrative purposes only and do not represent actual iShares Fund performance. Index and yield performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
