The combination of low interest rates and rising stock prices could prompt some investors to get involved in preferred stocks – an income-generating asset class with similar characteristics to bonds and stocks.
Preferred funds are readily available with passive exchange-traded funds, but this is an asset class where active management can be beneficial for income investors. Enter the ETF Virtus InfraCap US Preferred Stock (NYSEArca: PFFA).
As an active fund, PFFA can capitalize on valuation opportunities while focusing on companies with a strong balance, ensuring that preferred dividends are not risky. These are not advantages that are found in most passive funds in this category and these advantages are relevant at a time when certain other segments of the bond market are expensive.
“Valuations for investment grade and high yield corporate bonds are expensive, and we prefer full benchmark allocations to these asset classes, but without over-allocating them. To meet yield needs, we favor preferred securities, ”according to Wells Fargo.
PFFA: Powerful Income Idea
The $ 416.75 million PFFA, which turned three last month, lives up to the hype with returns that posted an 8.48% return at the end of the first quarter. However, the story of PFFA is not limited to pure performance and many of the fascinating chapters come from the active management of the fund.
For example, preferred shares considered for inclusion in PFFA are valued based on the company’s return on capital, historical trends in profitability, the issuer’s ability to generate cash in the future, and its ability to access capital, if necessary.
In addition, PFFA does not generally offer any exposure or limited exposure to redeemable preferred shares with negative yield / call ratios. Additionally, Virtus funds enhance the preferred income proposition by using option overlays – a strategy not common with passive funds in this category.
As an actively managed fund, PFFA can also take advantage of factors that specifically affect preferences rather than focusing only on interest rates.
“Active managers benefited from the overweight position in stocks that suffered revenue or price impacts from COVID-19 (i.e. real estate, energy, travel and non-investment stocks). grade) “, according to Virtus. “Investing in preferred stocks using active managers offers an attractive opportunity as (i) interest rates remain low, (ii) credit considerations remain, (iii) market dislocations persist and (iv) Preferred shares trading well above par can be sold for gains and substituted for securities with similar yields.
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The opinions and forecasts 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.