What is FPFD? (Pros, Cons, and Strategies)

If you're looking to diversify your investment portfolio, FPFD could be an excellent addition. FPFD stands for Fidelity Preferred Securities & Income ETF, an ETF that seeks to provide high income by investing primarily in preferred securities. Today, we'll delve into what FPFD is, its pros and cons, and some tailored investment strategies.

What is FPFD?

FPFD is a relatively recent addition to the Fidelity family of ETFs, focusing on preferred securities and income. Preferred securities are a type of equity that generally pays fixed dividends and has priority over common stocks in terms of asset and earnings distribution. This makes them a hybrid investment, combining elements of both stocks and bonds.

Key Features of FPFD

• Diversified Holdings: FPFD invests in a variety of preferred securities to offer diversified exposure within this asset class.
• High Income Potential: The primary focus is to provide a high level of current income.
• Monthly Distribution: Unlike many ETFs that distribute dividends quarterly, FPFD offers monthly dividend payments.

The fund managers aim to strike a balanced approach by picking securities that deliver high income while trying to mitigate interest rate sensitivity and credit risk.

FPFD Composition

FPFD primarily consists of preferred securities issued by companies in sectors such as financials, utilities, and real estate. Notable holdings include preferred securities from well-established corporations like Bank of America and JPMorgan Chase, which have a strong track record of consistent payments.

Pros of FPFD

High Income Potential

One of the standout features of FPFD is its ability to provide a high level of current income. Preferred securities typically offer higher yields compared to common stocks and even some types of bonds. This makes FPFD a desirable option for income-focused investors.

Monthly Distributions

FPFD is structured to offer monthly dividend payments, providing a regular stream of income. This can be particularly appealing for retirees or those looking for a predictable income source.

Lower Volatility

Preferred securities generally exhibit lower volatility compared to common stocks. This means that even during turbulent market conditions, FPFD’s price tends to be more stable, offering a level of security to investors.

Capital Preservation

Given that preferred securities have a higher claim on assets compared to common stock, FPFD tends to offer better capital preservation in case of company liquidation. This adds an extra layer of security for the investor.

Cons of FPFD

Interest Rate Sensitivity

Preferred securities are sensitive to interest rate changes. When interest rates rise, the price of preferred securities tends to fall, which can adversely impact the performance of FPFD.

Limited Capital Appreciation

FPFD focuses on income generation rather than capital appreciation. While this suits income-focused investors, those seeking significant growth in their portfolio might find limited opportunities here compared to equity-focused ETFs.

Credit Risk

While FPFD aims to invest in highly rated preferred securities, there is still an inherent credit risk. In a deteriorating credit environment, the value of FPFD’s holdings could decline.

FPFD Investment Strategies

Given its unique structure and focus, FPFD is not a one-size-fits-all investment. Here are a few strategies that could help you make the most out of FPFD.

Long-term Income Strategy

FPFD is highly suited for long-term investors seeking a reliable income stream. By holding FPFD over the long term, you can benefit from its regular monthly payments and relatively stable value. This strategy is ideal for retirees or individuals planning for retirement.

Diversification Strategy

If your portfolio is heavily skewed towards common stocks or growth-oriented assets, adding FPFD can offer diversification. The lower volatility and regular income can act as a stabilizing force in your portfolio.

Reinvestment Strategy

To maximize the benefits of FPFD, consider a reinvestment strategy. By reinvesting the monthly dividends, you can leverage the power of compound interest. Over time, this can significantly boost your income and returns.

Conclusion

FPFD, or Fidelity Preferred Securities & Income ETF, offers a compelling investment opportunity for those seeking high income and lower volatility. With its diversified holdings in preferred securities, monthly distributions, and focus on capital preservation, FPFD can be a valuable addition to an income-focused portfolio. However, be mindful of its sensitivity to interest rate changes and limited potential for capital appreciation. By considering strategies like long-term income investment and reinvestment, you can effectively harness FPFD's strengths to meet your financial goals.