Why Taxes Matter for Equity Income, and Where PFXF Fits
January 30, 2026
Read Time 3 MIN
What Taxes Should Equity Income Investors Consider?
For advisors constructing income-focused portfolios, understanding after-tax yield is critical to managing client outcomes. Taxes can substantially reduce the income investors keep. Understanding how different sources of equity income are taxed is important to evaluate true after-tax yield. For income-focused portfolios, headline yield can be misleading. Taxes play a major role in determining how much income ultimately reaches a client’s pocket.
- Taxes can significantly reduce realized income, especially when distributions are taxed at ordinary income rates.
- Different income types receive different tax treatments, meaning two investments with the same yield can produce very different after-tax results.
- Higher yields may come with higher tax drag, particularly when income is not eligible for preferential tax rates.
Understanding How Equity Income Is Taxed
Not all dividends are taxed the same way. Qualified dividends benefit from lower federal tax rates, making them especially attractive for taxable clients seeking income. These differences mean that from a portfolio construction standpoint, income source can matter as much as income level.
| Income Type | Typical Tax Rate | Examples |
| Qualified Dividends | Long-term capital gains | U.S. common stocks, certain preferreds |
| Ordinary Dividends | Ordinary income rates | REITs, bond ETFs |
| Capital Gains Distributions | Capital gains rates | ETFs, mutual funds |
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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.
PFXF | VanEck Preferred Securities ex Financials ETF
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.
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IMPORTANT DISCLOSURE
1 Because preferred dividends may be eligible for QDI, PFXF differs structurally from income strategies that primarily generate ordinary income.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors can not invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
An investment in the Fund may be subject to risks which includes, among others, preferred securities, convertible securities, hybrid Securities, foreign securities, credit, interest rate, floating rate, subordinated obligations, REITs, small- and medium-capitalization companies, utilities sector, real estate sector, communication services sector, industrials sector, market, operational, call, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount, liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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IMPORTANT DISCLOSURE
1 Because preferred dividends may be eligible for QDI, PFXF differs structurally from income strategies that primarily generate ordinary income.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors can not invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
An investment in the Fund may be subject to risks which includes, among others, preferred securities, convertible securities, hybrid Securities, foreign securities, credit, interest rate, floating rate, subordinated obligations, REITs, small- and medium-capitalization companies, utilities sector, real estate sector, communication services sector, industrials sector, market, operational, call, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount, liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Small- and medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.