Below is an excerpt from today’s Fixed Income Weekly, which is sent out each Wednesday to recap and analyze developments in fixed income markets both in the US and around the world. Sign up for Bespoke Institutional with our Annual Outlook special to read it today and beyond.
From a price return perspective, preferred share ETFs have been in a world of hurt. Major preferred share ETFs like VRP (Invesco Variable Rate Preferred ETF), PFF (iShares US Preferred Stock ETF), PGX (Invesco Preferred ETF), and PGF (Invesco Financial Preferred ETF) are at or near 52-week lows. Worse, price has gone nowhere since 2014, with prices down almost 6% since the inception of VRP back in May of 2014. That’s pretty brutal.
Fortunately for fixed income investors with preferred exposure, price is not the driver of returns for the product. As shown in the chart below, despite the horrible price returns, total returns on average across all four ETFs listed above are a solid 21% since 2014. Interest returns are significantly higher at more than 26%. Moreover, while day-to-day volatility is almost entirely a function of the price return, interest return is the overwhelming driver of aggregate total returns. As with other fixed income ETFs, failing to account for interest accruals in the form of dividends is a critical mistake that can lead to missed opportunities.