The threat of rising interest rates still lingers over the financial market in this low-rate environment. One option to consider is the Invesco Variable Rate Preferred ETF (VRP).
This ETF derives the majority of its income from preferred stock dividends. Preferred stock dividends are akin to a VIP card for stockholders.
“Companies must generally pay distributions to preferred stockholders before paying dividends to investors holding common stock,” an ETF Database analysis explained. “Preferred stockholders are generally ahead of common stockholders in liquidation proceedings, but still behind creditors. Preferred stock is appealing to investors looking for more income than they’d get from dividends or bonds.”
Obtaining income in this low-yield environment is challenging, especially if investors are relying heavily on bonds. It becomes quite a quandary when adding rising rates to the mix, which can erode income derived from bonds.
“Interest rates may be rising soon, and investors should be anticipating what that could mean for their stock and bond holdings,” a U.S. News article explained. “Depending on their portfolios, investors may see certain sectors weakened and other sectors strengthened by rising interest rates. It may have them reevaluating their bond holdings and the strength of the stock market.”
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-rate and variable-rate U.S. dollar-preferred stock, as well as certain types of hybrid securities determined by the index provider 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.
Fed Easing Equals Rates Rising
With the Federal Reserve openly projecting that it is looking towards quantitative easing, the writing on the wall just got underlined and bolded. The easing of bond purchases in an improving economy means a flood of debt issues in the open market, which in turn causes interest rates to rise.
“As investors gain confidence in the sustainability of this expansion, and the Fed, at the same time, starts dialing back its accommodation, the path of least resistance for long-term interest rates will be higher,” says Angelo Kourkafas, investment strategist at Edward Jones in St. Louis.
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