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By Paul Vieira

Canada has agreed to purchase air-strike weaponry from Boeing and RTX as the U.S.'s northern neighbor ramps up military spending.

The U.S. Defense Department said the transaction, with a $2.68 billion price tag, would improve Canada's defense capability and strengthen its ability to contribute to continental security.

One of Prime Minister Mark Carney's initial moves upon winning power this year was to accelerate Canada's defense spending, which failed to meet requirements outlined by the North Atlantic Treaty Organization and triggered widespread criticism from senior U.S. lawmakers and officials.

A representative for Canada's Department of Defence didn't immediately respond to a request for comment.

The multibillion-dollar deal comes as the U.S. and Canada remain at an impasse in talks to resolve their tariff row. Carney's office said the prime minister is expected to briefly meet with President Trump on Friday in Washington, on the margins of the World Cup draw at the Kennedy Center.

Write to Paul Vieira at paul.vieira@wsj.com

By Amey Stone

At a time when there aren't a lot of compelling opportunities for safe yields, preferred shares have plenty going for them. These hybrid securities have properties of both stocks and bonds and generally offer yields between 6% and 7%. They are mostly issued by high-rated financial firms and the bank sector's fundamentals are terrific these days. Banks have recently posted strong earnings growth, passed stress tests with ease, and are facing diminishing regulatory pressure.

"We're finding that investors today like the idea of sourcing income from higher quality issues," says Doug Baker, head of preferred securities at Nuveen. Credit-rating firms rate the preferreds lower than the senior debt of the same issuers since preferreds are subordinate to bonds in the event of default. That explains the higher yields earned for preferreds over corporate bonds.

But defaults are unlikely with high-rated issuers. "We think the rating firms overpenalize the preferreds of strong credits," says Jay Hatfield, CEO of asset manager InfraCap and portfolio manager of the $1.9 billion in assets Virtus InfraCap U.S. Preferred Stock ETF (PFFA).

With market volatility increasing, preferreds should provide steady income and more stability than stocks. With tax season around the corner, it's a major plus that many preferreds pay qualified dividend income, or QDI, which is generally taxed at 15% to 20% rather than at higher ordinary income-tax rates bonds are subject to.

Preferred returns have been weak this year, which means they aren't as expensive as other fixed-income options where spreads — or the yield they earn over a risk-free bond — are at historic lows. Preferred spreads are about average with historic levels.

"They have better relative value versus high yield and versus investment grade bonds," says Brian Cordes, the portfolio specialist for preferreds at Cohen & Steers. "The income is the highest in the investment-grade rated universe and the majority is qualified dividend income so investors have some significant tax advantages, too." The $7.6 billion Cohen & Steers Preferred Securities & Income (CPXAX) is up 7.5% year to date.

The largest index fund, the $14 billion in assets iShares Preferred & Income Securities ETF (PFF) is up only 4% year to date and has a yield of 6.4%. Last year it returned 7.2%, which at least was a bit above the yield. UBS' preferred strategist Frank Sileo described the sector this year as "muddling toward modest mid-single-digit gains," in a late November report.

"That's disappointing — to earn less than the coupon," says Hatfield. His fund yields 9.6% and is up 7.2% this year after returning 16% last year. His actively managed ETF seeks out higher-income preferreds and deploys leverage, which boosts yields but could also magnify any losses.

Hatfield attributes this year's middling returns to a flood of new issuance, including by some unusual issuers like Boeing and Strategy, the world's largest corporate holder of Bitcoin, as well as some waffling over the direction of Fed rate policy.

"The normal rally you'd expect in preferreds when the Fed cuts rates hasn't occurred," he says. Now there is more clarity — odds of a Fed rate cut next week are about 90% — and more rate cuts are expected next year, which should increase demand for preferreds. "We think this is a buying opportunity," says Hatfield, who expects investors to redeploy some of the $8 trillion they now have in money markets to preferreds.

A Changing Landscape

It's important for preferred investors to recognize that characteristics of the broader asset class are shifting. While there has always been a lot of variety among preferreds, the presence of large issuers like Boeing and Strategy, as well as more issuance from utilities is changing the nature of indexes. Hatfield says some of the big new issuers are more like stocks in terms of risk. His fund owns Strategy and Boeing preferreds, but neither are large holdings.

In contrast, iShares PFF's current top holding is Boeing at 4% of the fund. Strategy is third largest, with a 1.5% weighting. The other top holdings are mostly financials, according to Morningstar. "With preferreds, you really have to analyze the credit to see if the risk/reward is right for you," says Hatfield. "Index funds don't do that. They buy what's issued."

Indeed, what to buy now is the hard part (or the fun part, some investors might argue). Portfolio managers of actively managed mutual funds tend to favor the institutional grade preferreds, which have a $1,000 par value. These trade over the counter, like corporate bonds, in contrast to $25 par value preferreds that trade on exchanges and are much easier for individual investors to access.

The $1,000 preferreds offer more income and lower duration, says Nuveen's Baker, who manages the $5.6 billion flagship mutual fund Nuveen Preferred Securities & Income (NPSAX) (Nuveen also has preferred closed-end funds and an ETF). He is a fan of some hybrid securities trading outside the U.S., such as those issued by Canadian banks. "We all might define the investible universe of preferreds a little differently," he notes.

Cohen & Steers' Cordes also sees better value in the institutional preferreds, especially what are known as contingent capital securities, or cocos. Those two subsectors make up the majority of securities in the firm's preferred mutual fund.

Since the institutional preferreds are harder for individual investors to buy, that makes a case for buying an actively managed mutual fund or exchange-traded fund. But to complicate matters, several of the largest ETFs only buy the $25 exchange-traded securities, which are more liquid, and can also be more volatile.

Closed-end funds are another option for yield-seekers. Sangeeta Marfatia, senior closed-end fund strategist at UBS, recommends all the preferred funds in her coverage area, but is a fan in particular of three Cohen & Steers funds (symbols are PSF, PTA, and LDP), because they emphasize the institutional preferreds and trade at discounts to their net asset value.

When it comes to choosing among individual securities, even those issued by well-known banks, investors need to be aware that the same companies can offer preferred stock issues with a variety of dividend rates, call features, and options to convert to equity depending on their funding needs. Investors have to sort through all that. For all these reasons, when it comes to selecting preferreds, says Hatfield: "It's easier to let people like us do this."

Write to Amey Stone at amey.stone@barrons.com

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