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]

VRP Credit Quality

Table Courtesy: PowerShares

ETF Trends editorial team contributed to this post.