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Grow income with adjustable-rate securities

Case for preferred & capital securities

March 13, 2025 | 2 min read
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Current income opportunities

Elevated U.S. Treasury yields can create a favorable environment for adjustable-rate securities, particularly fixed-to-refixed preferred and capital securities.

Explore Principal Spectrum Preferred Securities Active ETF

Income push-up with fixed-to-refixed securities

Issuers of fixed-to-refixed securities typically face two options: allowing a security to reset at a higher rate or calling the security at par. Investors may be concerned about the outcome of either option, with some finding it counterintuitive that an issuer might call a security with a low coupon when interest rates are higher. However, in the current market rate environment, both options can offer income advantages for investors.

Case study: Citigroup and its effect on investors

Investors can benefit whether the issuer resets or redeems the security.

Citigroup’s fixed-to-refixed perpetual preferred stock, trading at a discount at $95 in early 2024, was redeemed in 2025 at par ($100). Prior to the Citigroup redemption announcement, it was expected that the dividend reset structure of +323 basis points (bps) would reset the coupon higher, boosting income due to the reset.

However, with the redemption, investors received a payout from their discounted securities at par and had the opportunity to reinvest the proceeds into a new security offering a higher yield. Further, if they purchased securities with similar reset coupon structures, they would also be rewarded with the refixed income push-up, potentially securing attractive income that can last at least another five years due to its reset off the five-year Treasury.

If reset

Illustrating Citigroup case study. Coupons before and after reset.

Purchasing new issuance from redemption of discounted securities at par

Illustrating Citigroup case study. Coupon earned from reinvesting.

Source: Spectrum Asset Management, Bloomberg. As of January 27, 2025. The case study is for example and illustrative purposes only and not an indication of future results and no representation as to the returns that may be experienced by investors.

Basis points (bps): A unit of measure used to indicate percentage changes in financial instruments. One basis point is equal to 1/100th of 1%, or 0.01%.

Active management: Mitigating credit & call risk

Preferred and capital securities may help investors generate income in today's market environment. With a 30-year history of analyzing, managing, and pricing complex security structures across a variety of credit, interest rate, and regulatory conditions, our approach identifies opportunities in the $1,000 par market while actively mitigating risks.

Consider Principal Spectrum Preferred Securities Active ETF

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Carefully consider a fund’s objectives, risks, charges, and expenses. Contact your financial professional, visit www.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.

Asset allocation and diversification do not ensure a profit or protect against a loss.

Fixed income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal bond investment options nor their yields are guaranteed by the U.S. government. Lower-rated securities are subject to additional credit and default risk.

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.

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Unlike typical ETFs, there are indices that the Principal Active High Yield ETF or Principal Spectrum Preferred Securities Active ETF attempt to track or replicate. Thus, the ability of the Funds to achieve their objectives will depend on the effectiveness of the portfolio managers.

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