VRP - Say No To Fixed-Rate Preferred Stocks With VRP

2025-03-26 11:51:57 ET

Summary

• VRP's portfolio consists of 85 exchange-traded holdings with an average credit score close to Baa3, split into bonds (13%) and preferred stock (87%).
• OTC Preferred stocks represent close to 50% of the entire portfolio of VRP.
• Investors have access to the better-priced fixed-to-floating and reset rate preferred stocks via VRP.
• We provide a detailed view of the fund's holdings, separating them into the proper categories.
• The evaluation models are used for comparison only.

With all the uncertainty in the world around us, one needs to consider exposure to instruments that are not fixed rate. Financial companies have issued many fixed-to-floating and reset-rate preferred stocks since 2021. For a major financial company, this brings very little risk because they reserve the option to redeem the security. Convexity always works in their favor, while the investor feels somewhat special in being able to invest in exotic instruments that supposedly have limited interest rate risk embedded. Most of these preferred stocks trade over the counter. The ones that trade on the major exchanges can be seen in the portfolio of the Invesco Variable Rate Preferred ETF ( VRP ) . Today, we will examine its portfolio and try to make an assumption about what yield we can expect out of its portfolio in the future. Without further ado, let's begin....

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