Riding the Wave: Preferred Stocks and the Virtus InfraCap ETF’s Surging Performance
The financial world is buzzing about the unexpected surge in preferred stocks, a traditionally less-volatile asset class. One particular ETF, the Virtus InfraCap U.S. Preferred Stock ETF (PFFA), managed by Infrastructure Capital Advisors, is experiencing remarkable growth, raising questions about the potential of this often-overlooked investment avenue and highlighting the expertise of its fund manager, Jay Hatfield. This article delves into Hatfield’s strategy, the ETF’s recent performance, and the underlying factors driving this unexpected boom in preferred stock value.
Key Takeaways: Why You Should Pay Attention
- Exceptional Returns: The PFFA ETF is up 10% in 2024 and nearly 23% over the past year, showcasing significant potential for investors.
- Strategic Positioning: The ETF focuses on “asset-intensive businesses,” leveraging the current economic climate for high-yield opportunities.
- Market Outperformance: High-yield bonds and preferred stocks are demonstrating resilience, even outperforming other fixed-income categories – a trend expected to continue post-tightening cycles.
- Top Holdings: The ETF’s top holdings include major players in finance and energy, sectors currently experiencing notable growth, further solidifying its portfolio strategy.
- Mispriced Opportunities: Hatfield highlights his team’s ability to identify and capitalize on mispriced assets relative to risk and yield, showcasing skillful stock picking.
Understanding the Appeal of Preferred Stocks
Preferred stocks occupy a unique space in the investment landscape. They’re distinct from both common stocks and bonds, offering a blend of features from each. Unlike common stock, preferred shareholders generally don’t have voting rights. However, they often receive a fixed dividend, paid before common shareholders and prioritized in bankruptcy proceedings. Hence, their return is more predictable than common stock. Yet, compared to the steadfast returns of bonds, preferred stocks offer a potentially greater yield. This makes them an appealing option for investors seeking a balance between risk and reward.
The Risk-Reward Dynamic
While preferred stocks offer higher yields than many bonds, they aren’t without risk. Their value can fluctuate with changes in interest rates and the overall market sentiment. Furthermore, the dividend payments are not guaranteed, and in difficult economic times, companies may suspend or cut these payments. This inherent risk is the reason why they haven’t always been as popular as other investment vehicles. Yet, this risk is often seen as proportionate to the potential rewards, particularly in specific economic environments.
The Virtus InfraCap U.S. Preferred Stock ETF (PFFA): A Closer Look
The PFFA ETF, managed by Infrastructure Capital Advisors CEO Jay Hatfield, is designed to capitalize on these preferred stock opportunities. Its focus on assets identified as mispriced, relative to their risk, and its superior performance suggests a robust investment strategy. Hatfield’s experience and insight into the market are key factors underpinning the ETF’s success.
Hatfield’s Strategic Approach
Hatfield emphasizes selecting companies engaged in “asset-intensive businesses,” a strategic choice that seems brilliantly aligned with current market conditions. These are companies that possess significant tangible assets, providing a degree of stability and making them less susceptible to rapid valuation swings.
His comments to CNBC’s “ETF Edge” highlight his belief that **”High-yield bonds and preferred stocks… tend to do better than other fixed income categories when the stock market is strong, and when we’re coming out of a tightening cycle like we are now.”** This reflects his keen understanding of macro-economic trends and their impact on preferred stock yields.
PFFA’s Top Holdings and Sectoral Focus
As of September 30th, the ETF’s top three holdings included Regions Financial (RF), SLM Corporation (SLM), and Energy Transfer LP (ET). These companies represent diverse sectors – finance and energy – with each experiencing significant growth in 2024. The choice of these diverse yet robust sectors reflects a diversified strategy to mitigate risks.
Sector Breakdown and Investment Thesis
The inclusion of Regions Financial speaks to the overall strength of the financial industry, which has largely weathered the economic changes. SLM Corporation (Sallie Mae) in the education finance sector, benefits from generally stable demand for student loans, making it a resilient investment. Lastly, the inclusion of Energy Transfer LP reflects confidence in the persistent demand for energy and the resilience of this crucial sector of the market. These diversified holdings contribute to the ETF’s strong performance, proving the value of a well-balanced strategy.
Long-Term Performance and Future Outlook
While the PFFA has seen spectacular recent growth – a nearly 23% increase in the past year – it’s important to note that its performance since inception in May 2018 shows a nearly 9% decline. This underscores the inherent volatility of even the most strategically managed investments. The fact that it has bounced back from this past performance speaks to the robustness of the ETF’s current market positioning.
Navigating Volatility and Long-Term Growth
The long-term performance underscores the importance of assessing investment potential beyond short-term fluctuations. While the ETF’s recent growth is undoubtedly impressive, it’s crucial to remember that the current economic and macro conditions provide an unusually favorable environment for its currently chosen portfolio, which will undoubtedly change with time. Investors should always carefully assess their own risk tolerance before investing.
Hatfield’s emphasis on identifying “mispriced” assets suggests a proactive approach to managing risk. By targeting companies that are undervalued relative to their fundamentals, Hatfield’s strategy seeks to capitalize on market inefficiencies, mitigating potential losses and making the investments less vulnerable to market swings.
Conclusion: A Promising Investment Avenue?
The performance of the Virtus InfraCap U.S. Preferred Stock ETF (PFFA) provides a compelling case for the potential of preferred stocks, particularly in the current environment. Jay Hatfield’s strategic focus on asset-intensive businesses, coupled with his team’s ability to identify mispriced assets, has yielded impressive returns. However, understanding and accepting the inherent risks associated with preferred stock investments remains paramount. The current growth does not guarantee future profits. Potential investors need to acknowledge the volatility associated with this asset class, and the need to have a long-term view despite the current success.
