Following the launch of the Indxx REIT Preferred Stock Index, Indxx  has licensed the new benchmark to New York-based ETF provider Infrastructure Capital Advisors to underlie the InfraCap REIT Preferred ETF (NYSE: PFFR).

The InfraCap REIT Preferred ETF (NYSE: PFFR) provides exposure to high yielding, liquid preferred securities issued by real estate investment trusts (REITs) listed in the US.

The Indxx REIT Preferred Stock Index provides exposure to high yielding, liquid preferred securities issued by real estate investment trusts (REITs) listed in the US. It includes a diversified combination of mortgage, office, hotel, healthcare, and retail REITs, among others.

Preferred shares have both equity- and bond-like characteristics, falling between company debt and common stock in the seniority of the firm’s capital structure. They generally pay a regular fixed or floating dividend, making the security’s price sensitive to changes in interest rates. Although dividends may be suspended by the company’s board without the risk of default, REIT preferred shares tend to be cumulative in that unpaid amounts are accrued until the dividend is reinstated.

While the equity-like nature of the security characterises it as a perpetual investment, most preferred shares do have an embedded callable feature, exercisable after a specified time period. This tends to lead to a cap on the potential appreciation of the security’s price. To limit the effect of such embedded options, the index only holds securities with a yield to worst of 3% or more. As of 1 January 2017, the underlying index showed a 30-day SEC yield of 6.8% and an average yield-to-worst of 6.7%.

To be included in the ETF’s underlying index, constituents must have a minimum $75m market capitalization, and an average monthly trading volume of 250,000 shares over the past six months.

Preferred securities in the index may include floating and fixed-rate preferred securities, callable preferred securities, cumulative and non-cumulative preferred securities, convertible preferred securities, trust preferred securities and depositary preferred securities. Constituents are weighted by modified market capitalization.

Indicative of the high income potential of the ETF to investors, as of 1 January 2017, the weighted average trailing twelve-month dividend yield of the index’s 31 constituents was 6.8%.

“Indxx is excited to have worked with our partners at InfraCap to identify a growing, high-quality yield opportunity in the REIT space and effectively target it via an index-based approach” said Rahul Sen Sharma, Partner at Indxx. “We look at it as another example of how we seek to distinguish ourselves as a custom index provider that adds value throughout the index development process.”

Investors should note however that income received from REIT preferred shares are generally not considered ‘qualified’ dividends and are thus not subject to preferential tax treatment like common dividends would be.

Jay D. Hatfield, Co-founder and CEO of InfraCap, commented on the launch, saying: “PFFR is the latest ETF to offer exposure to the REIT industry after S&P added REITs as the 11th sector in the S&P 500 and allows investors to invest in the real estate industry without having to select individual preferred securities. We also believe PFFR will be extremely attractive to investors looking for income in a yield-stretched market.”

Top holdings in the ETF include VEREIT (10.9%), WellTower (10.1%), Alexandria Real Estate (6.2%), Felcor Lodging Trust (6.0%) and National Retail Properties (5.3%).

Using back-tested data from 31 March 2004, the index has returned 8.0% per annum to the start of 2017.

The InfraCap REIT Preferred ETF has a total expense ratio (TER) of 0.45%.

While the InfraCap ETF is the first to track preferred shares exclusively from US-listed REITs, there are a number of existing ETFs tracking the broader preferred share market. The largest are the:

iShares US Preferred Stock ETF (NYSE: PFF)

Holding $17.0bn in assets under management (AUM), the ETF offers passive exposure to the broad US preferred share market, including both investment grade and speculative grade issues. Underlying the ETF is the S&P US Preferred Stock Index which consists of 299 constituents with a majority exposure in banking firms (42.1%) and diversified financials (19.2%) while real estate firms make up 11.1% of the index. The ETF is yielding 6.4% and has a TER of 0.47%.

PowerShares Preferred Portfolio ETF (NYSE: PGX)

With $4.4bn in AUM, the ETF tracks the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index, providing exposure to 254 fixed rate US dollar-denominated preferred securities issued in the US market. Financials make up the largest sector weighting at 79.0% with real estate coming in second at 9.1%. The yield of the fund is 5.7% and its TER is 0.50%.