Invesco PowerShares is to launch the PowerShares Variable Rate Preferred Portfolio (VRP) on 1 May on the NYSE Arca, providing investors access to a portfolio of variable-rate preferred securities.
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.
Accordingly, variable-rate preferred securities are priced more like short-term instruments, rather than long-term instruments, and are generally less sensitive than fixed-rate preferred securities to changes in interest rates.
“Investors today are challenged for ways to increase yield and meet their investment income objectives, while balancing portfolio exposure to the risk of rising interest rates,” says Lorraine Wang, Invesco PowerShares global head of ETF products and research. “We believe VRP offers investors the potential for high current income and lower interest-rate sensitivity than traditional fixed-rate preferred securities. Dividends from variable-rate preferred securities also receive preferential tax rates compared to interest income, which makes them particularly attractive for top tax bracket investors.+”
The PowerShares Variable Rate Preferred Portfolio (VRP) is based on the Wells Fargo Hybrid and Preferred Securities Floating and Variable Rate Index. The fund will generally invest at least 90 per cent of its total assets in preferred securities that comprise the index. The index is a market capitalisation-weighted index designed to track the performance of preferred stock, as well as certain types of “hybrid securities” that are functionally equivalent to preferred stock, that are issued by US-based or foreign issuers and that pay a floating or variable rate dividend or coupon.
The fund and the index are rebalanced monthly.