Invesco has launched an exchange-traded fund that aims to offer a return profile similar to that of high yield bonds, but with less volatility.
The Variable Rate Preferred Shares Ucits ETF launched today (8 October) on the London Stock Exchange, with Invesco claiming it is the only ETF in Europe that offers targeted exposure to a market worth $250bn (£191bn).
A spokesman for Invesco said the yield from preferred shares moves in line with interest rates and is comparable to high yield bonds, but the equities have historically offered lower volatility.
Preferred shares are hybrid securities, primarily issued by banks and other financial companies that want to raise tier one capital without diluting the value of common equity shareholders.
While technically being equities, a spokesman for Invesco claimed they behave more like bonds due to certain characteristics.
Chris Mellor, head of Europe, the Middle East and Africa ETF equity product management at Invesco, said income remained a dominant theme for investors in Europe as interest rates stayed low.
Mr Mellor said: "Investors wanting higher yields are often forced to take on more risk than they are 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.”
Today's (8 October) launch follows the fixed rate preferred shares ETF launched last year.
Invesco has also launched fixed income ETFs targeting the additional tier one capital bond market as well as floating rate notes.
Darius McDermott, managing director of Chelsea Financial Services, said the ETF would probably appeal to income-seeking investors, due to its yield of around 5 per cent and annual charge of 0.5 per cent.
He said: "Preference shares offer a similar yield to high yield bonds but with the credit risk of investment grade and lower duration. So attractive.
"But preference shares are not very well understood. I imagine it will appeal more to, and be used more by, the wealth manager community."
