Invesco is launching a new ETF that aims to provide investors with an attractive yield versus traditional US investment grade and high yield bonds.
The yield moves in line with changes in interest rates and is comparable to high yield bonds but in an asset class with historically lower volatility. The Invesco Variable Rate Preferred Shares UCITS ETF, which is launching on the LSE, is the only ETF in Europe that offers targeted exposure to this USD250 billion market.
Chris Mellor, Head of EMEA ETF Equity Product Management at Invesco, says: “With interest rates low, income remains a sought-after theme, particularly in Europe. Investors wanting higher yields are often forced to take on more risk than they’re comfortable with. Variable rate preferred shares are currently yielding around 5 per cent, just above what you would get from high yield bonds, while typically having an investment grade credit rating. They also have lower duration, meaning less interest rate risk.”
Preferred shares are hybrid securities, primarily issued by banks and other financial companies who want to raise Tier 1 capital without diluting the value of common equity shareholders. They are technically equities but behave more like bonds because of certain characteristics, including having defined distributions and long-dated fixed maturities. The difference with the variable rate variety is that yields move in line with interest rates, which could make them an appealing choice when rates are rising.