Preferred Stock ETF Offers New Twist

May 16, 2018

Virtus Investment Partners has rolled out an ETF that offers exposure to the preferred securities space while pairing it with an options strategy. The actively managed Virtus InfraCap U.S. Preferred Stock ETF (PFFA) is designed to generate current income and capital appreciation.

The fund comes with an expense ratio of 1.36% and lists on the NYSE Arca.

PFFA targets U.S. preferred stocks. Such securities straddle the divide between fixed income and equities, with investors paid a fixed dividend that takes priority over dividends paid to stockholders. In the event of bankruptcy, preferred stock investors take precedence over common stockholders, but not bondholders.

The fund is subadvised by Infrastructure Capital Advisors, which will take into account quantitative, qualitative and relative valuation factors in its approach to managing the fund.

The subadvisor can write put and call options for purposes of generating income and lowering the fund’s volatility. It will also use leverage to enhance returns, borrowing amounts generally between 15-25% of its net assets to enable it to buy additional securities, the prospectus says.

PFFA can invest in securities that are subject to call provisions, but the fund documentation notes it will underweight or avoid entirely those securities that trade above their call prices or that have a low-to-negative yield-to-call.

There are only three other actively managed ETFs targeting preferred securities. The largest is the $3.5 billion First Trust Preferred Securities & Income ETF (PFE), which launched in 2013 and costs just 0.85%. The other two funds in the category, the $82.5 million First Trust Institutional Preferred Securities and Income ETF (FPEI) and the $48 million Principal Spectrum Preferred Securities Active ETF (PREF), are also both significantly cheaper than PFFA, charging 0.85% and 0.55%, respectively.

Contact Heather Bell at [email protected]

               

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