Invesco launches Europe’s first variable rate preferred shares ETF

Oct 11th, 2018 | By | Category: Alternatives / Multi-Asset

Invesco has launched the Invesco Variable Rate Preferred Shares UCITS ETF (VRPS LN) on London Stock Exchange. It becomes Europe’s first ETF to offer exposure to the $250 billion variable rate preferred shares market.

Invesco launches Europe’s first variable rate preferred shares ETF

Invesco’s new variable rate preferred shares ETF is linked to an index devised and managed by giant US financial Wells Fargo.

The strategy aims to provide investors with an attractive yield versus traditional US investment grade and high yield bonds while offering potentially lower volatility.

Chris Mellor, Head of EMEA ETF Equity Product Management at Invesco, commented, “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%, 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.”

The fund is linked to the Wells Fargo Diversified Hybrid and Preferred Securities Floating and Variable Rate Net Total Return Index, which it tracks via a physical, representative sampling replication process.

The index covers US dollar-denominated preferred securities and certain types of hybrid securities that are functionally equivalent to preferred stock that pay floating or variable dividends or coupons.

Preferred securities include straight preferred stock, non-cumulative preferred stock, cumulative preferred stock, participating preferred stock, adjustable rate preferred stock, trust preferred securities, depositary shares, preference shares, convertible preferred shares and callable preferred shares.

Eligible hybrid securities include debt securities that have equity features such as deferral of interest payment obligations and the extendibility of maturity dates.

Floating rate dividends or coupons generally float at a pre-defined rate over an interest rate index level, such as the 3-month LIBOR (plus a spread). Variable rate dividends or coupons are generally fixed by the issuer for a specific period of time (5 or 10 years), after which the fixed dividend or coupon will convert to a floating rate dividend or coupon.

In order to be eligible for inclusion in the index, securities must have a tranche that is offered and traded in the US and there must be at least $100m par value or 10 million shares of the class outstanding. They must also have at least an average credit rating of B3 from the three main ratings agencies.

Currently, the index maintains an average investment grade rating as approximately two-thirds of its weight is assigned to securities with a rating of BBB while approximately the remaining third is in shares rated BB.

To ensure suitable liquidity, at least 75% of the securities in the index must have a minimum monthly trading volume of 250,000 trading units or a minimum notional volume traded per month of $25m. And to improve diversification, constituents are market capitalisation-weighted, subject to a 10% issuer cap. Additionally, no more than 40% of the index can be comprised of issuers that individually account for more than 5% of the Index.

Reconstitution and rebalancing occur on a monthly basis.

The vast majority (77.6%) of the index is exposed to securities issued by financial institutions (preferred shares and hybrid securities are primarily issued by banks and financials looking to raise Tier 1 capital without diluting common equity shareholders) while securities from energy companies (11.%) and industrials (5.3%) also play notable roles.

The fund comes with a total expense ratio (TER) of 0.50% and trades in US dollars. Income from the fund is distributed to investors quarterly.

It is Invesco’s third European domiciled product in the alternative income space following the launch of the Invesco Preferred Shares UCITS ETF (PRFD LN) in October 2017 and the Invesco AT1 Capital Bond UCITS ETF (AT1 LN) in June this year.

The asset manager will no doubt be hoping this latest fund emulates the success of its US-listed counterpart – the Invesco Variable Rate Preferred ETF (VRP US) – which launched in 2014 and now has over $2bn in assets under management.

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