Preferred Securities: Re-Evaluating an Underutilized Asset Class Heading into 2026

Destra Capital

As financial advisors look beyond year-end positioning and begin shaping portfolios for 2026 and beyond, income remains a central client objective. While traditional fixed income has come back into focus in the current rate environment, many advisors are also re-examining alternatives that historically sat outside core bond allocations.

One such area is preferred securities. Preferreds are a segment of the capital markets that remains underutilized by many advisors, yet may be increasingly relevant given the current and projected market environment.

Preferreds are often misunderstood or overlooked entirely. But as we head into the New Year, the case for considering preferred securities becomes more compelling.

Preferreds Today: A Hybrid of Stocks and Bonds

Preferred securities occupy a unique position in the capital structure, sitting above common equity but below senior debt. This hybrid positioning gives preferreds characteristics of both equity and fixed income, while also introducing structural complexity that may materially influence outcomes.

Unlike traditional bonds, preferreds often feature:

• long or perpetual maturities,
• call features that shape return profiles,
• fixed, floating, or reset coupon structures, and
• issuer-specific considerations tied to balance sheet strength and regulatory frameworks.

Many fixed income asset managers have long highlighted that preferreds should not be viewed as a monolithic asset class. Differences in structure, sector exposure, and issuer fundamentals can create meaningful dispersion, particularly in environments where rates, spreads, and credit conditions are evolving.

The 2026 Backdrop: Why Preferreds Are Being Revisited

Looking into early 2026, several macro themes continue to shape portfolio construction:

• Income remains a priority. Clients still require durable income solutions, even if rate volatility moderates.
• Rates may stay higher for longer. Current expectations for gradual easing, rather than aggressive cuts, will keep yield and structure relevant.
• Dispersion persists. Issuer-level and security-level differences matter more than broad beta exposure.
• Portfolio complexity is increasing. Advisors are balancing income, risk management, and diversification across multiple asset classes.

In this context, preferred securities may offer a differentiated, alternative income source that complements traditional fixed income allocations. However, they also require careful evaluation given their sensitivity to interest rates, call dynamics, and issuer fundamentals.

Why Active Management Matters in Preferreds

A common misconception is that all preferred securities behave similarly. In reality, preferreds can differ significantly based on:

• Coupon structure: fixed-rate, floating-rate, or fixed-to-floating resets
• Call features: near-term call risk versus longer-dated optionality
• Sector exposure: financials, utilities, energy, and beyond
• Issuer credit quality: evaluating the strength of the underlying preferred issuer is critical for capital preservation

These factors can materially affect income sustainability, price behavior, and downside risk as markets transition into a new phase of the rate cycle.

For this reason, many advisors and institutions view preferreds as an area where active security selection may be more appropriate than passive exposure. Active approaches allow managers to navigate structural nuances, manage call risk, and adjust exposures as fundamentals evolve.

Preferreds in Portfolio Construction: A Complement, Not a Replacement

Preferred securities are not designed to replace equities or core bonds. Instead, they may serve as:

• a complementary income allocation,
• a potential tax-advantaged diversifier within fixed income sleeves, or
• a targeted alternative exposure for clients seeking income with differentiated risk drivers.

The appropriate role of preferreds will vary by client objective, risk tolerance, and broader portfolio design.

Looking Ahead to 2026

As advisors prepare for 2026, the conversation around income is evolving. The focus is shifting away from simply where yield exists to how income is generated, what risks accompany it, and how it fits within a broader portfolio framework.

Preferred securities may deserve renewed attention in that discussion. With persistent high-income, potential tax-advantages, and meaningful dispersion across issuers and structures, preferreds represent an asset class where evaluation, education, and active management can matter.

Important Information
This material is for informational purposes only and is intended for financial professionals. It is not a recommendation to buy or sell any security. Preferred securities involve risks, including interest rate risk, credit risk, and call risk. Past performance is not indicative of future results.

Not FDIC–Insured, Not Bank Guaranteed, May Lose Value