Additionally, the PowerShares Variable Rate Preferred Portfolio Fund (NYSEArca: VRP) is also a good option for yield generation in a rising rate environment.
Preferred stocks are a type of hybrid security that show bond- and equity-esque characteristics. The shares are issued by financial institutions, utilities and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds. Preferred stocks issue dividends on a regular basis, but investors are unlikely to enjoy capital appreciation on par with common shares.
While preferred stocks provide investors with an attractive source of yields, the assets are vulnerable to rising interest rates – most preferred stocks are are extremely long-dated, which exposes investors to rate risk.
However, the variable-rate perferreds that VRP tracks usually trade more like bonds with shorter durations, so more conservative investors may find the lower-risk profile appealing. Specifically, VRP has an effective duration of 3.94 years and comes with a 5.19% 30-day SEC yield.
Financial advisors who are interested in learning more about fixed-income strategies can register for the Tuesday, December 2 webcast here.