However, there are ways to reduce preferred stocks' risks and still get attractive income. Today, combining 50% preferred stocks with short duration U.S. government bonds delivers an annualized 3.25% yield, which is higher than the 30-year U.S. Treasury. But the mix is half as risky as the Barclays Aggregate Bond Index, according to Morningstar. Meanwhile, the total return on the 50-50 preferred-stock/short-term Treasury mix is 5.5% so far this year, ended in June.
Nuveen's Baker says that financial advisors comfortable hedging can place a put option on the S&P U.S. Preferred Index Fund, an exchange-traded fund, to hedge client preferred holdings. The cost of put options in down markets can be lowered by using a collar strategy, which is accomplished by holding shares of an underlying stock, purchasing a protective put and writing a covered call on that stock.
"It can be done, but it depends on the individual advisor," he stresses.