Investors looking to add an income boost to their portfolios now have a new option. John Hancock Investment Management announced this week the launch of its Preferred Income ETF (JHPI), an exchange-traded fund that invests 80% of its assets into preferred stocks and other preferred securities. The ETF joins a growing pool of actively managed funds that primarily invest in preferred securities and income-producing assets, including a similar product that Fidelity unveiled in June.
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While the John Hancock offering is hardly the only preferred income fund on the market, it’s the company’s first ETF in this category. Subadvised by Manulife Investment Management, John Hancock’s affiliated asset manager, the fund launched Tuesday with a net expense ratio of 0.54%.
What Is Preferred Stock?
Preferred stock is one of the two types of equity available to investors who want to own a piece of a public company, with common stock being the other.
What sets the two apart? Dividends, mainly.
While the dividends of common stock can vary, preferred stock typically pays higher dividends at fixed rates, either on a monthly or quarterly basis. As a result, preferred stock is often thought of as a bond/equity hybrid that can offer investors consistent income in addition to capital appreciation.
Dividends are also paid to preferred stockholders before they’re distributed to common stockholders. In the event that a company is liquidated, preferred stockholders additionally have access to the company’s assets before common stockholders, but not before bondholders.
However, preferred shares do not come with voting rights, so preferred stockholders typically have less say in the direction of a company.
Preferred Stocks and Income Investing
Income investing is a strategy that seeks to create steady income, either from the dividends of a stock or the interest payments of a bond. Instead of investing in stocks that will grow in value on paper and then eventually be sold for a profit, income investors focus on assets that produce guaranteed cash for their portfolio.
Because preferred stock pays higher dividends than common stock, these equities can play an important role in the portfolio of an income investor or someone looking to add more income to their asset allocation.
While you can purchase individual shares of preferred stock, companies like John Hancock offer preferred income mutual funds and ETFs to investors seeking broader market exposure. These funds pool investors’ assets and purchase a variety of preferred securities.
“There is demand in the market to diversify sources of income. Preferred securities may provide more favorable yields with less interest-rate sensitivity than traditional bonds,” Steven L. Deroian, co-head of retail product at John Hancock Investment Management, said in a statement. “We see JHPI providing a new opportunity for investors and asset allocators who may be interested in diversifying their income sources and return characteristics.”
John Hancock Investment Management rolled out its new Preferred Income ETF this week, giving income investors another actively managed option to consider. Like similar funds, the ETF invests 80% of its assets in preferred securities that aim to deliver high dividends. Preferred shares typically pay higher dividends than common shares of stock, making them viable investments for income investors.
- Understand there are divergent views on income investing versus wealth/growth investing. A recent study from Dimensional Fund Advisors found that income investing offers fewer risks than wealth investing for retirees, especially during times of inflation, poor stock market conditions and interest rate decreases. However, an expert from Morningstar recently argued that investing heavily in equities, not bonds, is the best asset allocation for retirees.
- Whichever strategy you gravitate toward, a financial advisor can help you manage your investments and make critical decisions about your future. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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