PFFA: A Few Thoughts

A reader asked my opinion on the Virtus InfraCap U.S. Preferred Stock ETF (PFFA).

I do like the idea of having some exposure to the more cyclical / higher-yielding part of the preferred market, particularly given we are not far from the start of another macro cycle. I also like the fund’s willingness to run with additional leverage – not enough ETFs do this in my view.

That said, investors considering PFFA should keep the following things in mind.

First, the fund’s manager Jay Hatfield does not have a great reputation in the fund business given his track record with AMZA.

Two, the fund distribution coverage is around 75% so its income yield is closer to 6-7% versus the 9% that it says on the tin.

Three, the yield is further overstated due to the stripped yield / YTC dynamic in preferreds which I won’t get into here.

Four, you may be better off checking the fund’s holdings and then buying the individual preferreds in the sectors you like – that way you get to tailor your own portfolio and avoid the fund fees. You do miss out on potential alpha but see my first point.

Five, if you think there might be a risk of another drawdown in the medium term then you should probably avoid the fund. I do think not enough ETFs use leverage but when you invest in lower quality stuff and use leverage in an ETF wrapper (which has more strict rules than a CEF) then you could be looking at a forced deleveraging which is what looks to have happened in March. That’s what a 70% drawdown will tend to do.

Thanks for reading.

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