Invesco PowerShares launches Europe’s first preferred shares ETF

Oct 3rd, 2017 | By | Category: Alternatives / Multi-Asset

Invesco PowerShares has launched the first ETF in Europe to offer targeted exposure to preferred shares. The PowerShares Preferred Shares UCITS ETF (PFRD) is listed on the London Stock Exchange and becomes the first launch from PowerShares since its acquisition of rival ETF provider Source.

Nicolas Samaran, Head of Innovative Product Development at Invesco PowerShares

Nicolas Samaran, Head of Innovative Product Development at Invesco PowerShares.

Nicolas Samaran, head of innovative product development at Invesco PowerShares, commented: “With interest rates and bond yields at all-time lows, investors have really struggled to generate meaningful income. Preferred shares provide yields comparable to high-yield bonds, but from securities issued typically by more well-known companies.”

Preferred shares 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 floating-rate dividend, making them sensitive to changes interest rates. Although dividends can be suspended by a company’s board without the risk of default, 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 in the last five years, potentially making them an attractive option for investors looking to reduce overall portfolio volatility.

Mike Paul, head of Invesco PowerShares, EMEA, said: “Over the years, Source and Invesco PowerShares have both established reputations for innovation. Now that we’ve joined forces, we believe we can drive it forward even more effectively. This fund launch is a good example. It offers clients exposure to a market segment not available through any other European ETF provider, from a manager with 28 years of experience and the support of a team already managing around $30 billion of assets.”

The ETF tracks the BofA Merrill Lynch Diversified Core Plus Fixed Rate Preferred Securities Index, a reference for fixed rate, US dollar-denominated preferred securities issued in the US domestic market.

Index constituents are capitalisation-weighted, subject to a 10% issuer cap. Securities must be rated at least B3 based on the average of Moody’s, S&P and Fitch’s ratings.

The current rating breakdown of the index shows that BBB is the largest weight with 26.3%, followed by BB+ and BBB- with 24.3% and 20.3%. Only 2.9% of the portfolio is rated A- and above.

Financials, which typically have more complicated capital structures, make up the vast majority of the sector exposure with 73.8%, followed by real estate (9.5%) and Utilities (7.9%). All other sectors have less than 5% weight in the index.

The index has produced a 6.1% annualised return over the past five years, similar to the US high-yield bond market and significantly higher than US investment-grade bonds. So far in 2017, the index has returned 9.2% with a volatility of 1.6% and a yield of 5.8%.

The ETF and the index are rebalanced and reconstituted monthly. The fund is physically replicated and has a total expense ratio of 0.50%.

PFRD becomes the first European-listed ETF to offer investors access to the preferred share market. The lack of such an ETF up to now has been somewhat of a mystery considering their popularity in the US. with funds such as the Nasdaq-listed $18 billion iShares US Preferred Stock ETF (PFF) and the NYSE-listed $5bn PowerShares Preferred Portfolio ETF (PGX) commanding significant assets under management.

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