Low interest rates hurt fixed income investors. This is all on display this year, but the scenario may also prompt market participants to look at other income-generating asset classes, including preferred stocks.

Often referred to as hybrid securities, preferred stocks have both bond and equity related properties. Corporate issuers must pay preferred dividends before common stock payments, but preferred investors are supported after holders of corporate debt. Additionally, preferred holders are ahead of common shareholders but behind traditional bond investors if the issuing company goes bankrupt.

Overall, this is a high yielding asset class that has a lot to like for income investors. It is also the one that works well with active management, accessible via the Virtus InfraCap U.S. Preferred Equity ETF (NYSEArca: PFFA), among other exchange traded funds. There are compelling reasons to consider a preferred active strategy, such as PFFA, over traditional index rivals.

“Investors in preferred shares with a fixed rate coupon are generally positioned to profit from falling interest rates, credit spreads (i.e. risk premiums), or both. ” according to Virtus research. “However, since preferred shares are generally callable and perpetual, the timing of redemption is uncertain. Generally speaking, lower rates would encourage an issuer to call the preferred on the earliest repayment date. As a result, active managers in the preferred stock space will follow this timing in order to act opportunistically to add value. “

Break down the PFFA benefits

The $ 402.54 million PFFA recently celebrated its third anniversary and is one of the few actively managed funds among the 14 favorite ETFs on the market today.

PFFA differentiates itself from its competitors by focusing on maximum return on demand, deploying modest leverage and using option overlays to increase revenue. This methodology is paying off on the yield front. PFFA reports 7.66%, against 4.88% for the ICE Exchange-Listed Preferred & Hybrid Securities index.

There are other reasons to consider becoming active with PFFA. For example, active managers can report credit opportunities better than index funds. In addition, active managers can sell preferred shares above par and use this proceeds to fund purchases of undervalued preferred securities.

“We continue to see that trading in high yield preferred stocks is influenced more by idiosyncratic credit considerations than by the direction of government bond yields. For example, travel, transportation and some real estate companies, which were affected by the reduction in business and activity nationwide, continued to show a higher correlation with stock markets and then outperformed in 2021 ”, adds Virtus.

The proof is in the pudding. PFFA is up 14.20% year-to-date, while the ICE Exchange-Listed Preferred & Hybrid Securities index is stable.

PFFA ETF Holdings

For more news, information and strategy visit the active ETF channel.

The opinions and predictions expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.

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