If you’re exploring ways to generate reliable income from your investments, there are several strategies worth considering. From dividend income funds as an alternative to annuities for retirement read more here, to top performers like PIMIX explored in this article, and a gold standard of dividend ETFs, SCHD detailed here, there’s a range of options to meet your needs. For a closer look at high-yield ETFs, check out my analysis of the JEPI ETF here and compare it with SCHD in this post here. You can also explore core bond funds like FBND here, or dive into the differences between DIVO and JEPI covered call ETFs in this comparison. Now, let’s take a closer look at another attractive option for income investors—PFFA.
What?
The Virtus InfraCap U.S. Preferred Stock ETF (PFFA) is an exchange-traded fund that focuses on investing in preferred stocks within the U.S. market. Preferred stocks are a type of hybrid investment, combining characteristics of both stocks and bonds. They provide fixed dividend payments, similar to bonds, but also have the potential for price appreciation, like common stocks.
PFFA aims to deliver high income for investors through a strategy of holding a diversified portfolio of preferred securities. To enhance returns, PFFA uses leverage (borrowing money), which can amplify both the potential income and risks of the fund. As of recent data, PFFA offers a yield of around 8-9%, making it a popular choice for income-seeking investors, particularly those looking to supplement their retirement income or increase overall portfolio yield.
The fund is actively managed, which means its managers are continuously adjusting the portfolio to maximize returns and manage risks. In addition to preferred stocks, PFFA may invest in other income-generating securities and occasionally use derivatives to manage interest rate risks, making it adaptable to changing market conditions.
The Year-To-Date (YTD) total return chart below shows that PFFA has delivered a stable return of 20.34%, demonstrating lower volatility compared to the S&P 500 ETF (SPY), which has achieved a slightly higher return of 24.15% but with more pronounced fluctuations. This illustrates PFFA's consistent performance and resilience, making it an appealing choice for income-focused investors seeking reduced volatility.
So What?
PFFA stands out as an attractive option for income investors due to several key reasons:
High Yield Potential: PFFA offers a relatively high yield of around 8-9%, which is significantly above the average yield from traditional dividend-paying stocks or bonds. This makes it appealing for investors seeking regular income, especially in a low-interest-rate environment where other income-generating assets may not deliver sufficient returns.
Preferred Stock Stability: Preferred stocks, the core holdings of PFFA, are generally less volatile than common stocks. They often exhibit more predictable income streams, as dividends on preferred shares are paid out before dividends on common shares. Additionally, preferred stockholders have a higher claim on assets in case of company liquidation compared to common stockholders, making them a more stable choice during market downturns.
Leverage for Enhanced Returns: PFFA uses leverage (typically between 20-30% of the portfolio) to boost its yield and return potential. While leverage can increase the risk of the fund, it can also enhance returns, particularly when interest rates are declining or remain low. This dynamic has recently been favorable, as declining rates have benefited PFFA’s returns, amplifying the income stream from preferred securities.
Diversification Across Sectors: PFFA’s portfolio is diversified across various sectors, including financials, real estate, utilities, and infrastructure. This helps reduce risk, as it avoids over-concentration in any single sector. Additionally, its recent tilt towards real estate exposure indicates potential for further gains, as the sector has shown signs of recovery in the current economic cycle.
Potential for Capital Appreciation: While the primary focus of PFFA is generating income, there is also a possibility for capital appreciation if preferred stock prices rise, especially in a rate-cutting environment. As interest rates decline, the value of fixed-income securities like preferred stocks tends to increase, offering potential for additional returns beyond just the high yield.
Now What?
If you’re considering adding PFFA to your investment portfolio, here are some practical next steps:
Evaluate Your Income Needs: PFFA’s primary appeal is its high-yield potential, making it suitable for investors looking to supplement their income. Assess whether your current portfolio could benefit from a higher income stream, especially if you’re in or approaching retirement or aiming to enhance yield amid low returns from traditional assets like bonds or savings accounts.
Consider the High Expense Ratio: One drawback of PFFA is its relatively high expense ratio of 2.52%, which is considerably above average for ETFs. This is partly due to the fact that PFFA is an actively managed ETF, meaning that fund managers are constantly adjusting the portfolio to maximize returns and manage risks. While active management can potentially lead to better performance, the higher cost can eat into returns over time, particularly if the yield or price appreciation falls short of expectations. Before investing, weigh whether the potential income and returns from PFFA justify the higher cost of management.
Assess Your Risk Tolerance: While PFFA offers attractive returns, its use of leverage introduces additional risks, including potential price volatility and increased exposure to interest rate fluctuations. Make sure your risk tolerance aligns with these characteristics. If you’re comfortable with the possibility of amplified returns and potential losses, PFFA could be a suitable fit.
Factor in the Fund’s Size and Stability: On the positive side, PFFA has a net asset base of approximately $1 billion, reflecting strong investor interest and a more stable foundation compared to smaller funds. A larger fund size generally improves liquidity and can help maintain steadier dividend distributions over time, which is appealing for income-focused investors.
Diversify Wisely: Although PFFA is diversified across sectors and individual securities, it still has concentration in the preferred securities market. To manage overall portfolio risk, consider balancing PFFA with other asset classes, such as equities, bonds, or real estate, to create a well-rounded investment strategy.
Monitor Performance and Stay Informed: Regularly track PFFA’s dividend payouts, distribution levels, and overall performance to ensure they meet your income expectations. Also, keep an eye on broader market trends, as preferred stock ETFs can be sensitive to economic shifts and policy changes. Staying updated on PFFA’s performance and the interest rate environment will help you make informed decisions.
Concluding Remarks
In summary, the Virtus InfraCap U.S. Preferred Stock ETF (PFFA) offers a compelling opportunity for income-focused investors. Despite delivering a strong 30% total return since November 2023, it still maintains an attractive yield of around 8-9%, making it appealing even in a declining interest rate environment. The fund’s use of leverage, sector diversification, and active management create potential for steady income as well as capital appreciation.
However, the high expense ratio of 2.52% is a significant consideration, as it can erode returns over time. Moreover, the leveraged nature of the ETF introduces additional risks, particularly during periods of rate volatility or economic uncertainty. Therefore, investors should carefully assess their risk tolerance and overall portfolio strategy before adding PFFA to their holdings.
Ultimately, PFFA can be a valuable addition to a diversified income strategy, provided that investors are aware of the potential risks and costs associated with it. For those seeking high yield in a low-rate environment, it remains a solid option worth exploring further. As always, consult with your financial advisor to ensure it aligns with your personal investment goals and risk tolerance.
Comments