Preferred-stock funds have fallen out of favor this year as risk averse investors have flocked to bonds and aggressive market participants have cast their gaze to emerging markets. But those shifts in investor sentiment have created an opportunity to pick up some attractive yields.

Income-starved investors have flocked to corporate bonds, reducing spreads to levels that fail to compensate for underlying risks. This scant risk premium makes many bonds a questionable bet at the moment; savvy investors are looking further down the capital structure.

Preferred stock is one corner of the market that hasn’t garnered much interest lately, as investors appear focused on bonds and equities. But preferred shares offer more security than common stock as well as better prospects for price appreciation than bonds. They also make dependable payouts like bonds while generally qualifying for the more favorable 15 percent tax rate. To top it off, many quality names trade at attractive valuations.

Three exchange-traded funds (ETF) focus on preferred stock. iShares S&P US Preferred Stock Index (NYSE: PFF) is the best bet for investors seeking broad exposure to this asset class. Not only does the ETF boast a solid portfolio but its low expense ratio of 0.48 percent also allows investors to hold onto more of their returns. As the first preferred stock ETF to hit the market, it has built up an average daily trading volume of more than 1 million since its launch in 2007. This liquidity means it’s extremely easy to buy and sell shares. Additionally, it qualifies under the free or low-cost ETF trading programs now offered by a number of brokers.

Tracking the S&P Preferred Stock Index, the fund holds only preferred stock issued by companies with a market cap of over $100 million that also meet minimum price and liquidity requirements.

Based on those rules, financial names account for 86 percent of the fund’s investable assets. The portfolio’s financials holdings include preferred shares from the likes of Barclays Bank (NYSE: BCS), Bank of America Corp (NYSE: BAC), Wells Fargo (NYSE: WFC) and MetLife (NYSE: MET). This weighting toward financials is typical for funds of this ilk; financial companies have long used preferred stock as a favored financing source. Previously, this concentration would have made us nervous. Many of the portfolio holdings are issues from major money-center banks, the very institutions that stood to lose the most from financial reform. But now that we have a clearer picture of the extent of President Obama’s financial reform, we believe the ramifications aren’t as dire as many had expected.

Banks may still use and trade some derivatives, though riskier transactions will have to be conducted through affiliated companies that don’t threaten the banks’ solvency. Proprietary trading–a major profit center for the mega lenders–has been limited, though not eliminated, and banks will still have the leeway to invest up to 3 percent of capital in private-equity and hedge funds.

As it stands, the legislation doesn’t appear to be a killer for the banking industry. And with the recent shift in control of Congress some of the bill’s more onerous provisions could be repealed. Financials should enjoy plenty of upside as lingering concerns moderate.

Bank stocks and, by extension, iShares S&P Preferred Stock Index, took a hit in mid-November when the Federal Reserve announced that the nation’s largest lenders will be required to file capital adequacy plans before dividend payouts will be approved. That spooked some investors even though management teams believe they can payouts approved without disrupting current dividend policies.

Regardless, the new requirement appears to apply only to dividends on common shares, so payouts on preferred shares shouldn’t be interrupted.

In addition to the fund’s heavy exposure to financials, it also holds a 5.1 percent position in consumer discretionary names, a 1.7 percent weighting in industrials, as well as a 1.6 percent position in consumer staples. Energy and utilities each account for 1.4 percent of the portfolio’s weighting.

Finally, for those who still place their trust in credit rating agencies, the fund offers solid credit quality with just a third of the portfolio rated below investment grade.

While the recent sell-off has bumped the fund’s yield to 7.3 percent, iShares S&P Preferred Stock Index is an attractive play for investors with long investment horizons and a higher tolerance for risk. With monthly payouts usually in excess of 20 cents, you’ll be well compensated for holding the fund for the long-term.