Global X launches variable-rate preferred shares ETF

Jun 30th, 2020 | By | Category: Alternatives / Multi-Asset

FACTOR INVESTING - THURSDAY 14TH JULY 2022 (08:15-11:30) - THE BERKELEY, LONDON Please join us for our annual factor investing breakfast briefing with participation from MSCI, FlexShares ETFs, Tabula and Professor Stefan Zohren, Deputy Director of the Oxford-Man Institute of Quantitative Finance. Please register now if you would like to attend.


Global X has expanded its range of preferred shares ETFs with the launch of a new fund providing exposure to variable-rate securities.

Global X launches variable-rate preferred shares ETF

Variable-rate securities adjust their coupon payments periodically based on a benchmark interest rate and a pre-determined spread.

The Global X Variable Rate Preferred ETF (PFFV US) has listed on NYSE Arca and comes with an expense ratio of 0.25%.

Preferred shares are hybrid securities that fall between debt and common stock in the seniority of a firm’s capital structure. Although technically equities, they have many bond-like qualities.

They tend to pay a fixed or variable-rate dividend that can be suspended by a company’s board without the risk of default; however, some preferred shares may be cumulative in that unpaid amounts are accrued until the dividend is reinstated.

Although they display similarities to both equity and fixed income, preferred shares have exhibited a low correlation with both these asset classes, potentially making them an attractive option for investors looking to reduce overall portfolio volatility.

Methodology

The fund is linked to the ICE US Variable Rate Preferred Securities Index which consists of preferred securities denominated in US dollars and listed on a US stock exchange. Eligible preferred shares may be issued by US or non-US firms but must have a minimum amount outstanding of $50 million and be issued in $25, $50, $100, or $1000 par preference increments.

The index focuses on variable-rate securities that adjust their coupon periodically based on an interest rate benchmark, such as 3-month LIBOR, plus a pre-determined spread. It may also include fixed-to-floating securities which pay a fixed coupon, typically for ten years, before adjusting to a variable-rate approach.

Constituents are weighted by market capitalization subject to a single issuer cap of 10%.

By allocating to securities with variable coupon payments, the ETF may appeal to investors seeking to lower the interest rate risk of their portfolios in preparation for when interest rates begin to normalize from their historic lows. As of mid-June, the index had an effective duration slightly above 2 years.

At the same time, preferred shares may help investors achieve higher yields due to the high-income nature of the asset class. The index is currently yielding around 5.6%, and distributions are sent to investors on a monthly basis.

Global X offers two other preferred shares ETFs. The $600m Global X US Preferred ETF (PFFD US) provides diversified exposure to fixed and variable-rate securities, while the $160m Global X SuperIncome Preferred ETF (SPFF US) targets the 50 highest-yielding preferred securities in North America.

Alex Ashby, head of product development at Global X ETFs, said, “We were thrilled to see the strong reception to our existing preferred stock ETFs and are excited to introduce PFFV to further develop the fund suite. At Global X, we strive to continually provide investors with a range of tools that can help them efficiently attain their investment goals, such as diversifying one’s sources of income.”

Tags: , , , , , , ,

Leave a Comment