Most preferred stock ETFs are passively managed, but the Virtus InfraCap U.S. Preferred Stock ETF (NYSEArca: PFFA) shows investors may want to consider active management with this income-generating asset class.
PFFA seeks ccurrent income and capital appreciation in a sector that may be less understood by investors. The fund invests in a portfolio of over 100 preferred securities issued by U.S. companies with market capitalizations of more than $100 million, with a focus on income. The fund may provide the potential for attractive yields and generate compelling total return results.
Preferred stock is a class of equity security that typically pay fixed or floating dividends to investors and have “preference” over common stock, but they are subordinated to bonds. The issuing company must pay dividends to preferred stockholders before common stockholders, and in the event of a bankruptcy or liquidation of the company’s assets, must put the claims of the preferred stockholders ahead of the claims of the common stockholders.
“Four of the 14 preferred stock ETFs are actively managed,” according to Virtus. “Only one seeks to maximize yield-to-call, using modest leverage and an option strategy to enhance income which offers the potential for above-average current income.”
PFFA Power For Preferreds
Preferred stock also acts like a bond. Par value is assigned on the issue, and this price rises or falls based on interest rates. When interest rates go up, the par value of the shares is diminished, just like bonds. Some preferred shares even have a maturity date where the investors’ capital is returned. Finally, some preferred shares are callable, meaning the company can decide at any time to repurchase the shares (although usually at a premium).
“In addition to offering attractive income potential, preferred stocks have provided diversification and lower correlation benefits,” notes Virtus.
Data also indicate active management, such as what PFFA offers, can benefit preferred equity investors over the long haul.
“Preferred stock ETFs are predominately passively managed funds. Index-based strategies hold about 85% of the more than $31 billion of AUM in ETFs, and over $16 billion is concentrated in the largest passively managed ETF, which has underperformed the Morningstar Preferred Stock Category average and placed in the bottom quartile of the category for the 1-, 3-, 5- and 10-year periods through 8/31/19,” according to Virtus.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.