Inflation may not be dissipating anytime soon, which may require fixed income investors to seek other avenues of yield aside from bonds. One place to look is the Invesco Variable Rate Preferred ETF (VRP).
The U.S. Federal Reserve said it would push rates higher by 25 basis points to reach a key interest rate of 5.5%. That would equal its highest level in over 20 years, as inflation is proving to be more stubborn than the capital markets initially anticipated.
“Though consumer prices have declined for 12 straight months, in June, consumer prices increased 3% year on year,” a CNBC report noted. “Even though that’s the lowest the annual inflation rate has been in more than two years, it’s still too high for the Fed, which is looking to wrestle increases down to about 2%.”
The Fed has been walking a fine line between trying to tamp down inflation while avoiding a recession. Continuously pushing rates higher can dissuade consumers from using loans to purchase high-ticket items and thus stagnate economic growth.
“Inflation remains stubbornly high,” said Greg McBride, senior vice president and chief financial analyst for Bankrate.
“The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation,” he said. “So, Fed has to pump the brakes a bit more.”
A Preferred Income Option
With a 12-month distribution rate of 5.83% and a 30-day unsubsidized yield of 5.97%, income seekers can certainly look to VRP if the Fed continues to remain hawkish. As opposed to bonds, VRP derives its yield from preferred stock, helping to diversify fixed income portfolios.
Per its fund description, VRP is based on the ICE Variable Rate Preferred & Hybrid Securities Index. 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 determined by the index provider, comparable to preferred stocks, that are issued by corporations in the U.S. market.
As mentioned in its fund description, in order to obtain more yield, it will typically require the investor to assume greater credit risk. As such, VRB’s portfolio rests mostly in BBB- and BB-rated preferred stock.
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