Why Taxes Matter for Equity Income, and Where PFXF Fits

Preferred Securities and Tax Treatment

Preferred securities are a unique type of investment that sit between common stocks and bonds, offering higher income potential than common equity while still paying dividends rather than interest. Many preferred securities pay dividends that qualify as qualified dividend income (QDI)¹ . When eligible, these dividends are taxed at long-term capital gains rates, rather than higher income tax rates. This can improve after-tax income, particularly for clients in higher tax brackets. Not all preferred dividends qualify, but when they do, the tax advantage can significantly differentiate preferred-based income strategies from other high-yield equity or fixed income alternatives.

Common Tax Challenges for Income-Focused Equity Investors

Tax dynamics can complicate income planning, especially for clients seeking yield without increasing tax drag.
Even well-diversified income portfolios can face tax-related headwinds:

• Tax drags on high-yield investments, where ordinary income taxation reduces net yield
• Unexpected capital gains distributions, which can create tax liabilities even when a client has not sold shares
• Complex income classification, making it harder to estimate after-tax returns

These challenges reinforce the importance of understanding not just how much income an investment pays, but how that income is taxed when evaluating allocation decisions.

Where PFXF Fits in a Tax-Aware Income Strategy

The VanEck Preferred Securities ex Financials ETF (PFXF) provides exposure to preferred securities outside the financial sector, with a focus on income generation and diversification. From an advisor perspective, PFXF may serve as a complementary addition to income portfolios where after-tax efficiency is a consideration. A key consideration for taxable investors is that a portion of PFXF’s income has historically been derived from dividends that may qualify as QDI, depending on issuer and structure. When dividends are qualified, clients may benefit from lower effective tax rates compared to ordinary income-producing investments. By capturing preferred dividends, and not just interest income, PFXF can potentially deliver more tax-efficient income relative to other high-yield strategies.

Portfolio Placement Matters: Taxable vs. Tax-Advantaged Accounts

While preferred securities can offer tax advantages, account placement still matters:

• Taxable accounts may benefit more from QDI-eligible income
• Tax-advantaged accounts (IRAs, 401(k)s) can help shelter ordinary income and capital gains

Understanding where preferred-focused strategies like PFXF fit within an overall portfolio can help clients optimize after-tax income, not just pre-tax yield, and better align income generation with client objectives.

The VanEck Preferred Securities ex Financials ETF (PFXF) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the ICE Exchange-Listed Fixed & Adjustable Rate Non-Financial Preferred Securities Index (PFAN4PM), which is intended to track the overall performance of U.S. exchange-listed hybrid debt, preferred stock and convertible preferred stock issued by non-financial corporations.

¹ Because preferred dividends may be eligible for QDI, PFXF differs structurally from income strategies that primarily generate ordinary income.