Preferred and capital securities

Access high-quality defensive fixed income

Why preferred and capital securities can offer several compelling benefits to a portfolio:

Strategic

  • Offers competitive risk-adjusted yield relative to credit quality and historical defaults compared to other fixed income alternatives1
  • Unique security structures offer potential for higher back-end spreads that could result in increased coupons and help manage interest rate risk
  • Low correlations to other asset classes and other fixed income categories2
  • Qualified dividend income (QDI) for preferred and capital securities can offer an after-tax yield pickup versus traditional corporate and high yield bonds while maintaining investment grade quality

Tactical

  • Given its discounted prices, preferred and capital securities may provide an opportunity for investors looking for income
  • The asset class has historically offered attractive performance in flat or declining rate environments3
  • Allocation to defensive coupon structures, namely fixed-to-floating and fixed-to-variable $1,000 par preferred securities and fixed-to-variable CoCos, may offer investors an attractive current yield with a potentially supportive back-end yield

Contingent capital securities (CoCos) may have substantially greater risk than other securities in times of financial stress. An issuer or regulator’s decision to write down, write off, or convert a CoCo may result in complete loss on an investment.

Historically favorable yield relative to duration and credit quality

In today’s uncertain interest rate environment, global preferred and capital securities may offer attractive yields, higher income potential, and favorable lower duration when compared to other fixed income asset classes.

The case for preferred and capital securities (PDF)

Current yield
Current yield (Preferreds)
Effective duration
Bar chart comparing the current yield of preferred securities and other fixed income asset classes.

Additional information

Past index performance is not a reliable indicator of future performance.

Source: Spectrum Asset Management, Inc., Bloomberg LLP, and Barclays. As of December 31, 2023. Index performance information reflects no deduction for fees, expenses, or taxes. Indices are unmanaged and individuals cannot invest directly in an index.

Bloomberg U.S. Aggregate Index (U.S. Agg) provides a broad-based measure of the U.S. investment-grade fixed income markets.

ICE BofA U.S. All Capital Securities Index (Preferred and capital securities) tracks the performance of fixed rate, U.S. dollar denominated hybrid corporate and preferred securities publicly issued in the U.S. domestic market.

ICE BofA U.S. High Yield Index (U.S. High Yield) tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market.

ICE BofA U.S. Corporate Index (U.S. Corporate) tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market.

ICE U.S. Broad Municipal Index (U.S. Municipal) tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market.

ICE BofA Current 10-Year U.S. Treasury Index (U.S. 10-year Treasury) is a one-security index comprised of the most recently issued 10-year U.S. Treasury note.

Citations

1 Based on annual default rates between 2013-2022. Source: Moody’s Investors Service (investment grade corporate bonds and high yield corporate bonds); Spectrum Asset Management, Inc. (preferred and capital securities). Note: Preferred and capital securities default rates include deferrals that may not constitute technical events of default. All default and deferral rates are volume weighted. Past performance is not an indication of future results.

2 Source: Barclays Live, Bloomberg, LLC, Spectrum Asset Management. Monthly returns are used for correlation calculations. Barclays and POINT are registered trademarks of Barclays Capital Inc. or its affiliates. Indices are unmanaged and do not take into account fees, expenses and transaction costs. Indices are not available for direct investment. Past performance is not an indication of future results. PPSIX 5-year correlations as of 12/31/2023.

3 Source: Bloomberg, Spectrum Asset Management.
Disclosure

Carefully consider a fund’s objectives, risks, charges, and expenses. Contact your financial professional, visit PrincipalAM.com, or call sales support at 800-787-1621 for a prospectus, or summary prospectus if available, containing this and other information. Please read it carefully before investing.

Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Risks of preferred securities differ from risks inherent in other investments. In particular, in a bankruptcy preferred securities are senior to common stock but subordinate to other corporate debt.

Investment advisory services are offered through Principal Global Investors LLC or its affiliates. Principal Funds and Principal Global Investors are members of the Principal Financial Group®.

Spectrum Asset Management, Inc., is an affiliate of Principal Global Investors. Principal Funds are distributed by Principal Funds Distributor, Inc. ALPS Distributors, Inc. is the distributor of the Principal ETFs. ALPS Distributors, Inc. and the Principal Funds are not affiliated.

Asset allocation and diversification do not ensure a profit or protect against a loss. Investing in ETFs involves risk, including possible loss of principal. ETFs are subject to risk similar to those of stocks, including those regarding short-selling and margin account maintenance.

Investor shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Ordinary brokerage commissions apply.

MM13296-04 | 04/2024 | 3439035-022025 | PRI001403-042026