Bank of America Identifies Opportunity for Strong Returns with These Assets

Bank of America sees an opportunity to grab solid yields with these assets

Unlocking Investment Potential: Why Preferred Securities are a Smart Choice for 2024

Welcome to Extreme Investor Network, where we empower you to make informed investment decisions! As we navigate through the complexities of today’s financial landscape, one investment avenue is standing out: preferred securities. In this blog post, we’ll explore why this asset class deserves a place in your investment portfolio, even amid potential challenges in the current economic environment.

Understanding Preferred Securities

Preferred securities blend the features of both stocks and bonds, making them a unique investment option. They trade on exchanges like common stocks while offering fixed dividends akin to bond interest payments. This hybrid nature allows investors to benefit from favorable cash flow while potentially enjoying capital appreciation.

When the price of a preferred security falls, yields rise—a valuable opportunity for investors looking to maximize returns. In 2024, preferred stocks continued to offer impressive performance despite some market volatility. According to recent insights from Bank of America, broad market $25 par preferreds, measured by the ICE BofA Core Plus Fixed Rate Preferred Securities Index, delivered a robust return of 7% in the past year, outpacing investment-grade corporate bonds.

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Key Metrics to Know

  • Effective Yield: Currently at 5.04%
  • Yield to Maturity: Sitting at 6.28%

For those new to preferred securities, the distinctive aspects to note include their trading structure—$25 par preferreds are mostly aimed at retail investors, while $1,000 par preferreds attract institutional buyers. While many preferreds have extended maturity dates or are perpetual, they typically come with "call dates," allowing issuers to redeem them under certain conditions.

Navigating Potential Headwinds

As we look into the investment horizon for 2024, it’s essential to acknowledge that while preferred securities present a compelling opportunity, there are potential challenges on the horizon. Experts believe that the Federal Reserve may take a more subdued approach towards interest rate reductions than initially anticipated, which could lead to elevated trading ranges for interest rates.

Michael Youngworth, head of global convertibles and preferreds strategy at Bank of America, emphasizes the fragile balance between tailwinds and headwinds in the preferred security market. "The duration and technical factors that benefited preferreds for the first ten months of 2024 may reverse as interest rates stabilize," he notes. Therefore, investors are encouraged to consider shorter-duration structures within preferreds for more stability.

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Smart Picks in Preferred Securities

As part of Bank of America’s analysis, they highlight several preferred stocks worthy of consideration based on their unique attributes. Focus on investments that have at least two years of call protection or trade at a 15% discount to their par value. Additionally, fixed-to-floating rate preferreds are highlighted as an attractive option—these stocks perform well in shifting market conditions, as they offer fixed rates until their call date and float subsequently.

Here are two noteworthy recommendations:

  1. Preferred Series A: Ideal for risk-averse investors seeking stable yield.
  2. Fixed-to-Floating Series B: Perfect for those looking to capitalize on fluctuating market rates.

ETFs: Simplifying Investment

For those wanting broad market exposure without the complexities of individual stock selection, exchange-traded funds (ETFs) specializing in preferred securities can be an excellent choice. Examples include:

  • iShares Preferred and Income Securities ETF (PFF): Features a 30-day SEC yield of 5.78% and a low expense ratio of 0.46%. Last year, it saw a total return of 7.88%.

  • Global X U.S. Preferred ETF (PFFD): Offers a higher 30-day SEC yield of 6.41% with an even lower expense ratio of 0.23%. This fund had a total return of 7.24% last year.
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Conclusion: The Case for Preferred Securities

At Extreme Investor Network, we believe that preferred securities represent a strategic avenue for investors in 2024 and beyond. While potential market challenges exist, the unique features of preferreds, coupled with their historical performance, make them an attractive option for those seeking yield and stability in their portfolios.

Stay informed, stay empowered, and make your investment decisions count. Explore our site for more insights, analysis, and resources tailored to help you navigate your investment journey effectively!