Powershares, the ETF division of Invesco, has launched an ETF product that invests in the preference shares of US listed companies.
Preference shares pay a pre-defined income, and the owners of those shares must be paid before the owners of “ordinary” shares can receive dividends. In this way, preferred shares behave more like bonds.
The ETF will be listed on the London Stock Exchange.
Nicholas Samaran, head of innovative product development at Invesco Powershares, said: “Preferred shares provide yields comparable to high yield bonds, but from securities issued typically by more well-known companies.”
The ETF’s underlying index has produced a 6.1 per cent annualised return over the past five years, similar to the US high yield market and significantly more than US investment grade bonds.
Over the past five years, preferred shares have shown low correlation to both equities and fixed income.
Managed by senior portfolio manager Jeff Kernagis, the ETF will be available in US dollars with an ongoing charge of 0.50 per cent a year.
Adrian Lowcock, investment director at Architas, said: “This is interesting I don’t think there are that many preferred shares left in the UK partly as it has been so cheap to raise debt through corporate bond issues so it makes sense that this ETF is looking at the US market which is much larger.
"Because of the change in stance of the Fed looking to raise rates and withdraw quantitative easing companies are going to find it harder to borrow money which could mean preference shares make a come back and rise in popularity.
"They are probably closer to corporate bonds than equities but are still riskier as they will rank behind corporate bonds and would behave more like equities in times of the company is under stress.
"That said preference shares are a useful diversifier and I think this could be useful for discretionary fund managers and portfolio constructors looking to diversify their bond exposure as rates rise.”
david.thorpe@ft.com
