Invesco’s (NYSE: IVZ) PowerShares unit, the fourth-largest U.S. ETF sponsor, expects to launch the PowerShares Variable Rate Preferred Portfolio, the first variable rate preferred stock ETF, on May 1. The new ETF will trade on the New York Stock Exchange under the ticker “VRP.”
The new ETF will track the Wells Fargo Hybrid and Preferred Securities Floating and Variable Rate Index, a cap-weighted index that follows preferred stocks and select hybrid securities. VRP and the index will rebalance on a monthly basis.
“Variable-rate preferred securities are typically issued at rates below fixed-rate preferred securities of similar quality, in exchange for the issuer bearing most of the risk for changes in interest rates. Accordingly, variable-rate preferred securities are priced more like short-term instruments, rather than long-term instruments, and are generally less sensitive than fixed-rate preferred securities to changes in interest rates,” according to a statement issued by PowerShares.
The PowerShares Variable Rate Preferred Portfolio could prove attractive to income investors when interest rates rise because most preferred shares are either perpetual or sport long durations, making the issues sensitive to higher rates.
Preferreds fall somewhere between bonds and stocks. Preferred share dividends take precedent over common share dividends but fall below bonds in a company’s debt obligation hierarchy. However, they do not benefit from earnings growth of the issuing company. The securities are also callable – an issuer can call the preferred stock and pay the investor at a pre-defined redemption price. In a rising rate environment, preferred shareholders are essentially stuck at the original rates. [Preferred Stocks and Rising Rates]