What is PFFA? (Pros, Cons, and Strategies)

As investors search for effective strategies to grow their portfolios, one option gaining interest is the Virtus InfraCap U.S. Preferred Stock ETF, known as PFFA. For those looking to balance income and growth, PFFA might be a compelling choice. This post will delve into what PFFA is, its pros and cons, and the strategies that could make it a beneficial addition to your investment portfolio.

What is PFFA?

PFFA stands for Virtus InfraCap U.S. Preferred Stock ETF. This ETF aims to provide high levels of current income by investing primarily in preferred securities issued by companies based in the United States.

Preferred stocks have characteristics of both equity and debt instruments. They offer higher yields than traditional equities and come with dividend payments that take priority over common stock dividends, albeit generally without the voting rights.

Key Features of PFFA

• High-Dividend Yield: PFFA focuses on providing a high-dividend yield by investing in preferred stocks.
• Active Management: Unlike many ETFs that passively follow an index, PFFA is actively managed to maximize returns and manage risks.
• Leverage: PFFA uses leverage to potentially enhance returns, although this also adds a layer of risk.

These features make PFFA particularly interesting for income-focused investors who are looking for higher yields alongside some degree of capital preservation.

PFFA Composition

PFFA primarily consists of preferred stocks issued by well-known companies in various sectors, including financials, utilities, and real estate. It aims to combine the higher yield of preferred securities with the active management approach to capitalize on income opportunities while managing associated risks.

Pros of PFFA

High Dividend Yield

One of the strongest attractions of PFFA is its high dividend yield. With yields often exceeding those of common dividend-paying stocks and bonds, PFFA provides a robust income stream. For investors who rely on their portfolios for income in retirement or want to reinvest dividends for growth, this is a major benefit.

Exposure to Preferred Stocks

Preferred stocks come with fixed or floating dividend payments, providing more predictable income compared to common stocks. This factor makes PFFA a safer bet for investors wary of stock market volatility. Moreover, preferred stocks often have higher yields than many fixed-income options.

Active Management

PFFA is actively managed, meaning fund managers continuously make decisions on buying and selling securities to maximize returns and mitigate risks. This can be a critical advantage when market conditions are volatile.

Leverage

The use of leverage can amplify returns, making PFFA potentially more rewarding compared to unleveraged ETFs. However, it is crucial to remember that leverage can magnify losses as well.

Cons of PFFA

Higher Expense Ratio

PFFA's actively managed structure and use of leverage contribute to a higher expense ratio compared to passive ETFs like SCHD. This fee can eat into returns over the long term, particularly if the fund's performance doesn't justify the higher cost.

Market Risk

Despite offering a relatively stable income stream, PFFA is not immune to market risks. The value of its underlying assets—preferred stocks—can fluctuate, affecting the ETF's overall performance.

Interest Rate Sensitivity

Preferred stocks can be sensitive to interest rate changes. When rates rise, the value of existing preferred stocks typically falls, which can negatively impact PFFA's net asset value (NAV).

Leverage Risks

While leverage can enhance returns, it also increases the level of risk. In volatile market conditions, leveraged ETFs can suffer substantial losses more quickly than their unleveraged counterparts.

PFFA Investment Strategies

To harness the benefits and mitigate the risks of PFFA, investors should consider the following investment strategies.

Income-Focused Strategy

If you rely on your portfolio for income—whether for daily living expenses or retirement withdrawals—PFFA's high yield can be a valuable asset. This strategy involves investing a portion of your portfolio in PFFA to leverage the steady income from dividends.

Diversification

Diversifying your investment across different asset classes can manage risk more effectively. In this context, PFFA can serve as a unique addition to a diversified portfolio thanks to its focus on preferred stocks, which behave differently from common stocks and bonds.

Reinvestment for Growth

Reinvesting dividends can amplify the power of compound interest. For long-term investors seeking to grow their portfolio, reinvesting the dividends paid out by PFFA back into the ETF can contribute to significant portfolio growth over time.

Tactical Allocation

PFFA can be used as part of a tactical asset allocation strategy, where investors adjust their holdings based on market conditions. During times of low-interest rates, the high yield from PFFA can be especially attractive. Conversely, investors might scale back on PFFA exposure when interest rates are expected to rise.

Conclusion

Virtus InfraCap U.S. Preferred Stock ETF (PFFA) offers high yields through investment in preferred stocks with the benefit of active management and leverage. While it presents appealing prospects for income-focused investors, the higher expense ratio and increased risk due to leverage warrant careful consideration. By implementing targeted strategies, PFFA can potentially become a valuable component of your diversified investment portfolio.