U.S. Preferred Stocks Gaining Popularity in Asia

The total return of U.S. preferred stocks, represented by the S&P U.S. Preferred Stock Index, gained 8.57% YTD as of Oct. 20, 2017.  U.S. preferred stocks are perceived to be an attractive investment, as they have historically offered higher yields than other asset classes, especially when the global rates remain low.  The indicative yield of U.S. preferred stocks was 5.90% YTD, which offered a significant yield pick-up over investment-grade corporates and comparable yield to high-yield bonds.

The spread is even higher when it is compared with Pan Asian bonds, as tracked by the S&P Pan Asia Bond Index.  The yield-to-maturity was about 4.30%, while the yields of individual countries like Taiwan and Korea were lower.  The yield-to-maturity of the S&P Taiwan Bond Index and the S&P Korea Bond Index were 0.96% and 2.20%, respectively.

In addition to the higher yields, Asian market participants could also benefit from the market transparency and ease of trading, as most of the U.S. preferred stocks are listed and tradable on exchanges. Fundamentally, a preferred stock is a hybrid security that has characteristics of stocks and bonds.  Preferred stocks pay dividends at a specified rate and receive preference over common stocks in terms of dividend payments and liquidation of assets.

Exhibit 1: Yield Comparison

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