PFFA has achieved standout performance among preferred stock and fixed-income ETFs, benefiting from active management and leveraged strategies. The Federal Reserve’s supportive monetary policies are anticipated to sustain PFFA’s capital appreciation and steady dividend payouts. While its higher expense ratio reflects the costs of leverage, the fund’s net returns remain robust, with potential for reduced costs as interest rates decline. However, investors should consider the risks of volatility and economic downturns. Over the long term, PFFA is expected to offer appealing returns for income-focused investors.
Introduction to PFFA: A Strong Performer in Preferred Stock Investing
I’ve been closely following the Virtus InfraCap U.S. Preferred Stock ETF (NYSEARCA:PFFA) for the past 18 months, publishing three detailed analyses during this time. PFFA has proven to be an exceptional investment, delivering double-digit total returns consistently.
- June 12, 2023: First article, total return since = 37%
- January 16, 2024: Second article, total return since = 17.9%
- April 18, 2024: Third article, total return since = 18.8%
Having started my investment in PFFA in May 2023 at prices as low as $18 per share, my total return on those early purchases now exceeds 40%. PFFA has become one of my top-performing investments, generating substantial monthly dividends. The buying opportunities in mid-2023 and early 2024 were outstanding, and I believe the ETF remains a strong investment today, supported by expectations of ongoing Federal Reserve monetary easing over the next couple of years.
PFFA: Best-In-Class Total Returns
My recent annual portfolio review during the Thanksgiving holiday highlighted PFFA’s exceptional performance compared to other fixed-income investments. While all my fixed-income ETFs, including preferred stock and corporate bond ETFs, have delivered positive returns, PFFA’s results are unmatched.
PFFA is a leveraged, actively managed preferred stock ETF with characteristics resembling a long-maturity corporate bond fund. While it isn’t directly comparable to an equity-focused ETF like SPY, a total return comparison since May 18, 2023, reveals just how impressive PFFA’s performance has been over the past 18 months.
This track record underscores why PFFA stands out as a “best-in-class” ETF for income-focused investors seeking high returns and consistent dividends.
PFFA: High-Yield Opportunity with Manageable Risks
PFFA has delivered stellar performance, significantly outpacing most other preferred stock and fixed-income ETFs. However, potential investors should temper their expectations, as PFFA’s future returns are unlikely to match those of the S&P 500. Two key factors may limit its performance:
- Federal Reserve Policy: Recent outperformance was fueled by the Federal Reserve’s shift to accommodative monetary policy. While further rate reductions are anticipated, the Federal Funds Rate is unlikely to drop below 2.5%.
- Preferred Stock Valuation Ceiling: Preferred stock prices, which rise as interest rates fall, are constrained by their par value (typically $25) due to the risk of being called.
Superior Historical Returns
Since its inception in May 2018, PFFA’s total returns have consistently surpassed asset-weighted averages and top-performing funds in actively and passively managed preferred stock and fixed-income categories. This success is attributed to:
- Active Management: Strategic selection and portfolio adjustments aim to maximize income and capital gains.
- Leverage: Borrowing to invest beyond the fund’s capital enhances yield through the spread between borrowing costs and preferred stock dividend yields.
Critics often cite PFFA’s higher expense ratio (currently 2.52%) as a drawback, but this reflects the cost of leverage and active management, both of which are crucial to its performance. Importantly, published returns are net of these expenses, ensuring investors realize the advertised gains.
Opportunities and Risks
PFFA’s cost of leverage, tied to short-term interest rates, is expected to decline as the Federal Reserve lowers rates, potentially boosting dividend payouts. However, risks include:
- Market Volatility: Overoptimism about rapid rate cuts and political uncertainty could create short-term price fluctuations, presenting buying opportunities.
- Economic Downturns: PFFA’s portfolio, heavily weighted toward bank and REIT preferred shares, may face headwinds during recessions, compounded by its leveraged structure.
Conclusion
Despite potential short-term risks, PFFA remains an attractive option for income-focused investors. With the Federal Reserve’s accommodative stance likely to persist, double-digit total returns are achievable over the next 2-3 years. PFFA’s history of consistent, best-in-class performance signals a well-managed strategy that has delivered substantial returns for investors. For those seeking long-term dividend stability and growth, PFFA continues to be a compelling choice.
