Preferred Securities as a High-Yield Haven: Analyzing FPE's Resilience in a Rising Rate World

In an era of persistent inflation and tightening monetary policy, income-focused investors are increasingly seeking alternatives to traditional high-yield bonds and dividend stocks. Among these, preferred securities have emerged as a compelling option, offering a unique blend of income potential and structural flexibility. The First Trust Preferred Securities and Income ETF (FPE) stands out as a prime example of how a well-structured fund can navigate rising interest rates while delivering consistent returns. By dissecting FPE's recent dividend performance, portfolio composition, and market positioning, we uncover why it remains a strategic asset for investors prioritizing yield in a challenging macroeconomic landscape.

Dividend Resilience: A Mixed Signal with Long-Term Promise

FPE's most recent dividend payment of $0.0772 per share on July 31, 2025, reflects its commitment to monthly distributions, a hallmark of preferred securities ETFs. While the trailing twelve-month (TTM) yield of 5.70% is attractive, the fund's dividend growth rate has declined by 16.54% year-over-year. This dip underscores the challenges of maintaining consistent payouts in a rising rate environment, where preferred securities—particularly fixed-rate ones—can face valuation pressures. However, FPE's inclusion of adjustable-rate preferred securities (e.g., from Bank of America, Barclays, and JPMorgan) provides a buffer. These instruments reset periodically, aligning payouts with current market conditions and mitigating the risk of prolonged yield compression.

For income investors, the key takeaway is FPE's ability to balance short-term volatility with long-term stability. While the fund's dividend growth has slowed, its 5.70% TTM yield remains competitive against high-yield bonds and equities, which have seen their valuations pressured by higher borrowing costs.

Portfolio Structure: A Blueprint for Rate Resilience

FPE's portfolio is engineered to thrive in a rising rate environment. As of August 15, 2025, the fund holds 252 securities, with 43.39% allocated to financials—the largest issuers of preferred securities. This concentration is both a strength and a risk, but FPE mitigates the latter through geographic diversification (57.88% U.S., 14.04% Canada, 7.44% U.K.) and a mix of fixed- and adjustable-rate instruments.

The fund's weighted average duration of 5.20 years is relatively moderate for a preferred securities ETF, reducing its sensitivity to rate hikes compared to longer-duration fixed-income assets. Additionally, 22.72% of the portfolio is allocated to contingent capital (CoCo/AT1) securities, which offer higher yields but come with conversion or write-down features during issuer stress. While these instruments add complexity, they also enhance yield potential in a low-growth environment.

Credit quality is another critical factor. FPE's holdings are predominantly BBB- and BBB-rated securities, indicating strong creditworthiness, while lower-rated BB+ and BB issues add a layer of yield enhancement. This balance ensures that the fund can generate income without overexposing itself to default risk.

Market Positioning: Active Management in a Passive World

FPE's active management strategy sets it apart from passive alternatives. The fund rebalances quarterly to align with its benchmark, the ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index, ensuring exposure to liquid, market-sized securities. This approach allows FPE to capitalize on rate shifts more nimbly than index-tracking peers.

Moreover, FPE's 0.85% expense ratio is competitive within the preferred securities ETF space, offering cost efficiency without sacrificing strategic flexibility. Managed by Stonebridge Advisors, the fund's focus on institutional (73.70%) and retail (26.30%) securities ensures broad access to the preferred market, which is often fragmented and less liquid.

The Case for FPE in a Rising Rate World

For investors seeking high-yield alternatives, FPE's structure addresses two critical concerns: income consistency and interest rate risk mitigation. Its blend of adjustable-rate securities and active management provides a hedge against rate hikes, while its geographic and sector diversification reduces idiosyncratic risks. However, the fund is not without caveats. The recent decline in dividend growth and exposure to CoCo/AT1 securities require careful monitoring, particularly in a scenario of prolonged financial stress.

Investment Advice: FPE is best suited for income-focused investors with a moderate risk tolerance who are seeking to diversify their fixed-income allocations. It should be considered as part of a broader portfolio that includes inflation-linked bonds and equities to balance rate sensitivity. Given its 5.70% TTM yield and strategic positioning, FPE offers a compelling case for those willing to accept short-term volatility for long-term yield resilience.

In conclusion, preferred securities like FPE represent a nuanced yet powerful tool for income generation in a rising rate environment. By leveraging adjustable-rate instruments, active management, and a diversified portfolio, FPE demonstrates how investors can navigate macroeconomic headwinds while maintaining a steady income stream. As central banks continue to tighten policy, the fund's ability to adapt will be its greatest asset.