Active management has advantages with preferred equity ETFs

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Most preferred equity ETFs are passively managed, but the ETF Virtus InfraCap US Preferred Stock (NYSEArca: PFFA) shows that investors can consider active management with this income-generating asset class.

PFFA seeks current income and capital appreciation in an industry that may be less understood by investors. The fund invests in a portfolio of over 100 preferred securities issued by US companies with a market capitalization of over $ 100 million, with an emphasis on income. The fund may offer the potential for attractive returns and generate convincing total return results.

Preferred stocks are a class of equity securities that generally pay fixed or floating dividends to investors and have a “preference” over common stocks, but they are subordinate to bonds. The issuing company must pay dividends to preferred shareholders before common shareholders and, in the event of bankruptcy or liquidation of the assets of the company, must put preferred shareholders’ claims ahead of common shareholders.

“Four of the 14 preferred share ETFs are actively managed,” according to Virtus. “One seeks to maximize the return on the purchase, using modest leverage and an options strategy to increase income that offers above average current income potential.”

PFFA power for favorites

The preferred share also acts as an obligation. A nominal value is assigned to the issue and this price increases or decreases according to the interest rates. When interest rates rise, the face value of stocks decreases, as do bonds. Some preferred shares even have a maturity date on which investors’ capital is repaid. Finally, certain preferred shares are redeemable, which means that the company can decide at any time to buy back the action.s (although usually at a premium).

“In addition to offering attractive income potential, preferred stocks provided benefits of diversification and lower correlation,” notes Virtus.

The data also indicates that active management, such as that offered by PFFA, can benefit preferred equity investors over the long term.

“Preferred equity ETFs are primarily passively managed funds. Index strategies hold about 85% of the more than $ 31 billion in ETF assets under management, and more than $ 16 billion is concentrated in the largest passively managed ETF, which has underperformed the average for the year. Morningstar category of preferred shares and placed in the bottom quartile of the category. for periods of 1, 3, 5 and 10 years until 8/31/19 “, according to Virtus.

For more strategies, visit our Core ETF channel.

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.

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