Extracting maximum yield in this low rate environment is difficult when rates are at the whims of the Federal Reserve, but there are solid options available to investors, including the Invesco Variable Rate Preferred ETF (VRP).
It’s one thing to seek higher yield, but it’s another matter entirely to get quality exposure. That’s where preferred securities become a prime option for both and more.
“Globally, the preferred securities universe represents a fixed-income asset class of approximately $850 billion,” an Invesco analysis noted. “Typically, investors choose preferred securities for their relatively high rates of income, quality and good liquidity. Preferreds may offer attractive total-return potential and modest correlations with other fixed-income asset classes as well.”
VRP is based on the ICE Variable Rate Preferred & Hybrid Securities Index (Index). The ETF will generally invest at least 90% of its total assets in fixed rate preferred securities in the U.S. market by financial companies.
The index is designed to track the performance of floating and variable rate investment grade and below investment grade U.S. dollar preferred stock, as well as certain types of hybrid securities that determined by the index provider, comparable to preferred stocks, that are issued by corporations in the U.S. market. The fund does not purchase all of the securities in the index; instead, the fund utilizes a “sampling” methodology to seek to achieve its investment objective.
From Rate Uncertainty Calls to a Preferred ETF
The Federal Reserve recently decided to keep rates close to zero, but inflation fears are still swirling in the capital markets. Getting the best yield with higher-quality debt makes VRP an ideal solution amid the uncertainty.
“While longer term bond yields have stabilized in recent months, historically high levels of monetary and fiscal stimulus continue to fuel a robust debate in the marketplace over the future path of inflation and interest rates,” wrote Jason Bloom, Invesco’s Senior Director of Global Macro ETF Strategy, in a blog post. “Whether or not inflation becomes a problem in the years ahead, the recent surge in consumer prices has made preservation-of-purchasing-power a hot topic in our daily conversations with clients.”
“And so we take this opportunity to highlight a few potential opportunities to help boost a portfolio’s income in a form that potentially insulates your portfolio from the effects of rising interest rates,” Bloom added. “In particular, we highlight longer-dated investment grade corporate BulletShares ETFs, as well as higher yielding portfolios targeting variable-rate preferreds, variable rate investment grade debt, and high-yield corporate bonds.”
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