Principal Spectrum Preferred Securities Active ETF (PREF) seeks to provide current income by actively investing in preferred securities and other income-generating instruments. Preferred securities are hybrid investments that combine features of stocks and bonds, typically offering higher yields than common stocks while maintaining priority over common shareholders for dividends and liquidation proceeds.
How It Works
PREF employs active management to select preferred securities, convertible preferred stocks, and other hybrid instruments based on credit quality, yield potential, and interest rate sensitivity. The portfolio managers analyze individual securities rather than tracking an index, focusing on investment-grade and high-yield preferred stocks from financial institutions, utilities, and REITs. The fund maintains flexibility to adjust duration and credit exposure based on market conditions, with quarterly rebalancing to optimize income generation.
Key Features
- Active management allows tactical positioning across preferred security types and credit qualities versus passive preferred ETF alternatives
- Targets higher-yielding preferred securities often issued by banks, utilities, and REITs for enhanced income generation
- Newer fund structure may offer more competitive expense ratios compared to established preferred security mutual funds
Risks
- This ETF can lose significant value when interest rates rise, as preferred securities are highly sensitive to rate changes, potentially declining 10-15% for each 1% rate increase
- Credit risk exposure means the fund will decline if preferred security issuers face financial stress, particularly impacting bank and utility holdings during sector downturns
- Active management risk exists as portfolio decisions may underperform passive preferred security benchmarks, especially during periods of manager misjudgment about rate or credit cycles
Who Should Own This
Best suited for income-focused investors with medium risk tolerance seeking higher yields than traditional bonds over 3-5 year time horizons. Appropriate as a satellite holding representing 5-15% of fixed-income allocation. Ideal for investors comfortable with interest rate sensitivity who want professional management of complex preferred security selection in tax-advantaged retirement accounts.