Virtus ETF Solutions has partnered with Infrastructure Capital Advisors (“InfraCap”) to launch the actively managed Virtus InfraCap US Preferred Stock ETF (PFFA US) on NYSE Arca.
Virtus ETF Solutions launches the Virtus InfraCap US Preferred Stock ETF on NYSE Arca.
The fund seeks income and capital appreciation by investing in a portfolio of more than 100 preferred securities issued by US companies with market capitalizations of more than $100 million.
Preferred shares fall between debt and common stock in the seniority of a firm’s capital structure. Although technically equities, they have many bond-like qualities.
They tend to pay a fixed or floating-rate dividend, making them sensitive to changes in interest rates. Although dividends can be suspended by a company’s board without the risk of default, some preferred shares may be cumulative in that unpaid amounts are accrued until the dividend is reinstated.
Although they display similarities to both equity and fixed income, preferred shares have exhibited a low correlation with both these asset classes in the last five years, potentially making them an attractive option for investors looking to reduce overall portfolio volatility.
While preferred securities may offer relatively high yields, the various product structures within the preferred share market can be confusing to investors. This may support the notion of an actively managed investment in the preferred securities market, administered by a team specialising in the different types of yield features, liquidity and covenants associated with different issuers.
Jay Hatfield, founder and chief executive officer at InfraCap, commented, “We are excited to offer PFFA because the nuances of preferred stock investing demands active management, which we can provide in an ETF form. Investors can benefit from active management in this sector, as the call features of preferred stock often require portfolio managers to avoid capital losses on mandatory calls.”
The fund’s portfolio managers rely on a variety of quantitative, qualitative and relative valuation factors to select securities and weightings for the fund. As part of their investment process, they evaluate companies for their competitive position, potential to earn high returns on capital, stability and reliability of profits, potential to generate cash in excess of growth needs, and access to capital.
Modest leverage is used to obtain enhanced portfolio beta and options strategies are used to seek enhanced current income.
William Smalley, executive managing director of Virtus ETF Solutions, commented, “InfraCap’s management style lends itself well to preferred stocks, and we believe investors seeking an enhanced income experience will find PFFA attractive. We are also pleased to have the opportunity to extend our longstanding partnership with InfraCap with the launch of this third ETF on the Virtus ETF Solutions platform”
The fund has a gross expense ratio of 1.36%.
Keeping in line with its income solutions theme, the new ETF joins two other InfraCap products on the Virtus ETF platform: the InfraCap MLP ETF (AMZA US), an actively managed MLP offering; and the InfraCap Preferred REIT ETF (PFFR US), a passively managed fund providing exposure to preferred securities issued by real estate investment trusts (REITs).