Preferred Stock ETFs Face New Test

One truly distinctive option to consider is the PowerShares Exchange-Traded Fund Trust II (NYSEARCA:VRP). This fund holds a basket of preferred stocks and floating rate securities with variable coupon payments. The intent is to offer a similar income dynamic to a traditional basket of preferred stocks with less interest rate risk than a fund like PFF. This ETF has become a popular landing spot for more investors over the last several years as concerns of rising rates have driven assets in VRP to over $1 billion.

As you can see in the comparison chart below, PowerShares Exchange-Traded Fund Trust II (NYSEARCA:VRP) has significantly outperformed its more conventional peer group over the last 52-weeks. No doubt much of this alpha has been driven by the moderated interest rate sensitivity.

Lastly, the Elkhorn S&P High Quality Preferred ETF (BATS:EPRF) was recently released to try and curry favor among income enthusiasts for its variant underlying index. This new fund offers a more concentrated portfolio of just over 100 securities from issuers with investment grade credit ratings. The intent is obviously to cull a basket of high quality fixed-rate preferred securities that eschews the credit risk of smaller or more financially risky companies.

The Bottom Line

Income investors have several attractive preferred stock ETFs at their disposal and new entrants are raising the bar even further. However, the real question is how these funds will react to additional upside in interest rates if that is indeed the prevailing trend throughout 2017. In my opinion, positioning these funds as smaller allocations and examining how they fit in the context of existing fixed-income exposure will be key to a successful outcome.

This post originally appeared on Investorplace.com.

Note: This article is written by David Fabian and was originally published on the FMD Capital Management blog. FMD Capital Management is a fee-only investment advisor which provides daily updates on ETFs, portfolio strategies, and market insights. Contact them for a free portfolio review.