Invesco Variable Rate Preferred ETF’s management team is rated Average, but a solid investment process still helps this strategy retain its Morningstar Medalist Rating of Bronze. The portfolio maintains a cost advantage over competitors, priced within the lowest fee quintile among peers.  

 The strategy's effective investment philosophy supports an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in corporate bonds and an underweight in A rated bonds compared with category peers. The strategy’s management team earns an Average People Pillar rating. The strategy's parent organization earns the firm an Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

Morningstar's evaluation of this fund's process seeks to understand management's investment philosophy, and whether it has been applied consistently over time and can add value across the market cycle. Invesco Variable Rate Preferred ETF earns an Above Average Process Pillar rating.    The main driver of the rating is that this fund tracks an index. Historical data, such as Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Excellent risk-adjusted performance also contributes to the process. This can be seen in the fund's five-year alpha calculated relative to the category average, which suggests that the managers have shown skill in their allocation of risk. Lastly, the process is limited by the parent firm's five-year risk-adjusted success ratio of 42%. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median Morningstar Risk-Adjusted Return for the period. The parent's relatively low success ratio suggests that the firm could do better across its fund lineup.

 Compared with other funds in the Preferred Stock Morningstar Category, this fund has been consistently sensitive to interest-rate changes over the past few years. Opening the analysis to additional factors, the portfolio has displayed biases over time, whether towards or away from certain fixed-income instruments. Compared with the category average, the managers have been substantially overweight corporate debt in recent years. Different from its historical appetite, however, the portfolio's bond sector was in line with the Morningstar Category peers in recent months. Additionally, there's been a notable underallocation from A rated bonds over the past few years. Similarly, in recent months, the strategy also had less exposure to A rated bonds than peers. Finally, during the past few years, the fund leaned towards debt with longer than 30-year maturities. In this month, the strategy also leaned more towards debt with longer than 30-year maturities compared with its peers.

 This strategy has a 6.4% 12-month yield, higher than its average peer's 5.9%. It also has a 5.6% 30-day SEC yield (a measure similar to yield-to-maturity). While a higher yield may deliver more income, it also tends to indicate higher credit risk. But that isn't always the case. Over the past 12 months, the average yield of the fund has been higher than the average yield of its Morningstar Category peers. The portfolio's average surveyed credit quality is on par with peers, with both the fund and the average being rated BB.

Above Average

Process

Invesco’s team is valuable but does not stand out as one of the industry's best, warranting an Average People Pillar rating. There’s a deep bench of five managers listed on the fund. Experience on the team is abundant, with 10 years of average portfolio management experience. Though they do not manage other products together, managers may manage them individually.  

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

Average

People

Invesco succeeds in a number of areas but also has its share of subpar offerings, along with many others that land somewhere in the middle. A mid-2023 change of CEO, from longtime chief Marty Flanagan to veteran Invesco executive Andrew Schlossberg, is noteworthy, and several other executives retired or departed in 2023. Portfolio-manager shuffles aimed at bolstering poor performers, which began under Flanagan, have continued under Schlossberg, who told Morningstar his most important aim is bolstering “investment quality.” However, major changes of direction or approach are unlikely. The firm retains a Morningstar Parent rating of Average. 
Invesco’s international-equity teams in Texas and New York remain solid. However, the extensive U.S.-equity lineup needs improvement. Fixed-income offerings run the gamut: The multisector and short-term-bond areas are good, but corporate high-yield is less impressive. The firm’s exchange-traded fund lineup includes the popular Nasdaq-focused QQQ; passive strategies make up around 37% of Invesco’s assets under management. Invesco has not been averse to trying new types of strategies, and it was among the firms that immediately launched a spot bitcoin ETF after SEC approval in early 2024.
The picture outside the United States is mixed. Fund performance has been subpar in Asia, and while the picture has brightened in the United Kingdom and Europe, that region still can’t be considered a strength.

Parent

Invesco Variable Rate Preferred ETF

VRP tracks a market-value-weighted index of variable- and floating-rate preferred stocks.

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Variable rate preferred stocks offer adjustable dividends tied to benchmark interest rates, making them appealing during rising interest rate periods.

VRP: Good Yield Over Time

VRP is an ETF that focuses on preferred equity from financial institutions, but with a twist - its collateral has to be at least 90% invested in floating rate securities. VRP has outperformed its fixed rate peer PFF since the beginning of the Fed tightening cycle due to its low duration of 1.93 years. PFF is expected to record an additional 9% gain versus VRP as rates move lower given historic correlations and duration impact.

VRP: Time For A Swap

iShares Preferred and Income Securities ETF is the dominant preferred ETF with over $12.76 billion in assets under management. The Invesco Variable Rate Preferred ETF could be getting more attention due to its floating rate exposure that shows less sensitivity to rising interest rates. Both had seen their yields start to rise, but some of those gains for PFF have been reversing more recently, while VRP's payout has continued to rise.

VRP Vs. PFF: Choice Comes Down To Outlook On Rates

Inflation may not be dissipating anytime soon, which may require fixed income investors to seek other avenues of yield aside from bonds. One place to look is the Invesco Variable Rate Preferred ETF (VRP).

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The Invesco Variable Rate Preferred ETF is down over 15% since my article last November, when I thought its variable-rate strategy would do okay when the FOMC pushed up rates. Here I take a look at VRP's largest holdings and try to decipher why its performance was poor. Analysis compares its return against other Fixed Income ETFs that took different paths.

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In low interest rate environments, preferred stocks and the related exchange traded funds are among income investors' favored destinations. However, as is the case with multiple high-yield asset classes, preferreds are often vulnerable to rising interest rates — the very scenario that investors are contending with today.

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Historically, high-yield asset classes have been vulnerable to rising Treasury yields. That includes preferred stocks — a favored income destination.

Variable Preferred ETF Offers Floating-Rate Note Alternative

The Invesco Variable Rate Preferred ETF is designed to capture better rates as they go up by investing in Floating or Variable Preferred securities. With rising inflationary pressures and possible start of Fed tapering, forecasts are for all Fixed Income assets to experience an environment where rates are climbing.

VRP: Variable Rate Preferred ETF: Nice Choice If Rates Rise

The threat of rising interest rates still lingers over the financial market in this low-rate environment. One option to consider is the Invesco Variable Rate Preferred ETF (VRP).

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Extracting maximum yield in this low rate environment is difficult when rates are at the whims of the Federal Reserve, but there are solid options available to investors, including the Invesco Variable Rate Preferred ETF (VRP). It's one thing to seek higher yield, but it's another matter entirely to get quality exposure.

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With government bond yields low, many income investors are embracing alternative yield sources this year, including preferred stocks and their related exchange traded funds. While yields on preferreds remain elevated relative to broader equity benchmarks and aggregate bond funds, some market observers believe preferreds are currently priced for perfection.

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