“While it is easy to relate the performance of preferred stock and long term bonds to interest rate changes, the two asset classes have shown a low correlation to each other over the last three years. Actually, the S&P U.S. Preferred Stock Index has had a higher correlation to the S&P 500 than it did to long term to bonds. There is a danger in just looking at the last three years of course as interest rates have been held low during the period,” adds Rieger.
There are ways for investors to stick with preferred even if rates do rise. For example, the PowerShares Variable Rate Preferred Portfolio Fund (NYSEArca: VRP) 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.
Variable-rate preferreds usually carry lower interest rates than fixed-rate preferreds of comparable credit quality. However, the trade-off there is an ETF such as VRP should be less sensitive to interest rate changes
VRP is just 11 months old and already has $160.6 million in assets, indicating there is an audience for an ETF that helps maintain preferred equity exposure without the interest rate risk found in traditional preferred ETFs. [Fast Start for a new Preferred ETF]
VRP has an effective duration of four years and a 30-day SEC yield of 4.84%. Investors have added almost $42.4 million in new assets to the ETF this year.
PowerShares Variable Rate Preferred Portfolio
