High Yield Alert: PFFA’s 8.9% Dividend Worth the Risk?

With interest rates near multi-decade highs, income investors are hunting for yield wherever they can find it.

The Virtus InfraCap U.S. Preferred Stock ETF (PFFA) offers an eye-popping 8.88% dividend yield.

But this actively managed ETF uses leverage to juice its returns and yield.

While the fund is up 35.31% over the past year, that leverage cuts both ways.

Our TrackStar data shows growing interest in preferred stock ETFs as investors seek alternatives to traditional bonds.

Let’s examine whether this high-yield ETF deserves a place in your income portfolio.

Key Facts About PFFA

• Net assets: $1.40 billion
• 12-month trailing yield: 8.88%
• Inception: May 15, 2018
• Expense ratio: 2.52%
• Number of holdings: 215

PFFA takes an aggressive approach to preferred stock investing and charges a hefty 2.52% expense ratio for it, one of the highest we’ve come across.

Unlike traditional preferred stock ETFs, it employs leverage and active management to enhance yields.

The fund focuses on preferred securities from infrastructure companies, including utilities, energy, and real estate sectors.

This concentration in rate-sensitive sectors can lead to higher volatility than typical preferred stock funds.

Source: Virtus

To help you get a sense of who these companies are, here’s a breakdown of the top holdings:

• SLM Corp Preferred (2.97% of total assets) – Student loan provider
• Flagstar Financial Preferred (2.88% of total assets) – Regional bank
• SCE Trust Preferred (2.88% of total assets) – Utility company
• Energy Transfer LP Preferred (2.83% of total assets) – Energy infrastructure
• RLJ Lodging Trust Preferred (2.38% of total assets) – Hotel REIT

Performance

The numbers tell a story of strong returns with significant volatility.

The fund has consistently outperformed its benchmark index, though this comes with increased risk due to its leverage use.

Source: Virtus

Competition

Let’s examine how PFFA stacks up against other preferred stock ETFs as well as a convertible bond ETF to give us additional insights:

• PGX (Invesco Preferred ETF): A more traditional approach with a 0.50% expense ratio and 5.77% yield. Its 262 holdings provide broader diversification but lower returns.
• PFF (iShares Preferred & Income Securities ETF): The category leader with $15.27 billion in assets and 445 holdings. Its 0.46% expense ratio and 6.04% yield represent a more conservative approach.
• FPE (First Trust Preferred Securities & Income ETF): Actively managed but without leverage, offering a 5.62% yield with a 0.85% expense ratio.
• CWB (SPDR Bloomberg Convertible Securities ETF): Though not purely preferred stock, this convertible bond fund offers 1.76% yield with a 0.40% expense ratio.

PFFA stands out with its highest yield and strongest recent performance, but also carries the highest expense ratio at 2.52%. So, there is a give and take with what you can expect.

Our Opinion 5/10 

PFFA’s impressive yield and recent performance are attractive, but they come with significant risks.

The use of leverage magnifies both gains and losses, making this ETF more volatile than traditional preferred stock funds.

The high expense ratio of 2.52% is concerning, as it eats into returns over time. However, the fund has more than made up for this through outperformance.

This ETF could work as a yield enhancer in a diversified income portfolio but should not be your only preferred stock holding.

We recommend limiting exposure to no more than 5-10% of your income portfolio and being prepared for higher volatility than traditional preferred stock ETFs.