New Variable Rate Preferred ETF Debuts

ETF Trends

Invesco’s (IVZ) PowerShares, the fourth-largest U.S. issuer of exchange traded funds, on Thursday launched the PowerShares Variable Rate Preferred Portfolio (NYSEArca:VRP) .

VRP tracks the Wells Fargo Hybrid and Preferred Securities Floating and Variable Rate Index, a cap-weighted index that follows preferred stocks and select hybrid securities. VRP and the index will rebalance on a monthly basis. [PowerShares to Launch First Variable-Rate Preferred ETF]

The new ETF traded $1 million notional in its first day.

“Variable-rate preferred securities are typically issued at rates below fixed-rate preferred securities of similar quality, in exchange for the issuer bearing most of the risk for changes in interest rates. In the rising interest rate environment, we expect that their risk/reward profile and tendency to trade on a yield-to-call basis may provide variable-rate preferred securities the potential to outperform the fixed-rate preferred market. Typically, variable-rate preferred securities exhibit less sensitivity to interest rates than preferred securities which is an important feature for investors interested in building a more diversified income portfolio,” according to a statement issued by PowerShares.

Three-quarters of VRP’ 73 holdings are rated BBB or BB. Top-10 holdings include issues from Citigroup (NYSE: C), Goldman Sachs (GE), General Electric and Wells Fargo (WFC).

VRP is the first variable-rate preferred ETF to come to market, but PowerShares has had previous success with preferred ETFs, including the PowerShares Preferred Portfolio (PGX) and the PowerShares Financial Preferred Portfolio (PGF).

The PowerShares Variable Rate Preferred Portfolio 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.

Preferreds fall somewhere between bonds and stocks. Preferred share dividends take precedent over common share dividends but fall below bonds in a company’s debt obligation hierarchy. However, they do not benefit from earnings growth of the issuing company. The securities are also callable – an issuer can call the preferred stock and pay the investor at a pre-defined redemption price. In a rising rate environment, preferred shareholders are essentially stuck at the original rates. [Preferred Stocks and Rising Rates]

VRP Credit Quality

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Table Courtesy: PowerShares

ETF Trends editorial team contributed to this post.

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