PFFA: Not All Preferred ETFs Are Built Alike
Preferred shares occupy a unique space in the capital structure; technically equity, but with bond-like features such as fixed dividends and seniority over common stock in the event of liquidation.
They typically don’t have voting rights, and their prices tend to be more stable than common shares but more volatile than traditional bonds. This hybrid helps nature makes them attractive for income-seeking investors, especially those looking to diversify beyond just stocks and bonds.
One underappreciated benefit of preferreds is how well they can fit inside an exchange-traded fund (ETF). With an ETF, investors gain access to a basket of preferred securities that trades like a stock and generally provides regular income, often monthly. This makes the asset class more liquid and accessible than buying individual preferred shares.
But not all preferred ETFs are built the same. While passive index strategies are efficient and low-cost when it comes to equities, we believe preferreds are one area where active management has a real edge.
This is a less liquid part of the market, often with unique call provisions, credit considerations, and structural quirks that simple market cap-weighting can’t account for.
The Virtus InfraCap U.S. Preferred Stock ETF (PFFA) was designed with these nuances in mind. It prioritizes yield and total return, using an actively managed strategy tailored to the complexities of the preferred space. Here’s a look at what’s under the hood.
What Makes PFFA Tick
Rather than buying the entire preferreds market, PFFA uses a mix of quantitative and qualitative analysis to pick what it believes are the most attractive securities available.
This means avoiding low-conviction, low-return holdings and focusing instead on positions with higher yield and better fundamentals.
One example: PFFA screens out negative yield-to-call securities. These are preferred shares trading above their call price where, if the issuer redeems them early, investors could lose money. By filtering those out, PFFA aims to sidestep unnecessary capital erosion.
PFFA also actively manages exposure between fixed- and floating-rate preferreds, scrutinizes credit ratings closely, and diversifies across sectors, which is important in a market often dominated by financial institutions.
A key differentiator is PFFA’s ability to use modest leverage, typically between 20% and 25%. This adds to the fund’s income potential. The strategy has supported steady and historically rising monthly distributions.
Finally, there also can be a significant tax advantage. Most of PFFA’s distributions qualify as Qualified Dividend Income (QDI), which means they’re taxed at a lower rate than interest income from corporate bonds. For top earners, that could mean a 20% tax rate versus 37%, plus the 3.8% Medicare surtax applied to both.
PFFA's Track Record Of Outperformance
The performance data speaks for itself. Over numerous time horizons, PFFA has consistently outpaced the S&P U.S. Preferred Stock Index and its Morningstar peer category average.
The growth of $10,000 invested since inception highlights the compounding effect of both capital appreciation and reinvested distributions. By March 2025, PFFA turned that into $16,027 versus $12,807 for the index, roughly a $3,200 gap in absolute dollars.
PFFA combines thoughtful preferred security selection, sector diversification, active interest rate risk management, and a structural edge via leverage, all in a tax-aware wrapper.
For income-focused investors in the preferred space, we believe PFFA shows why structure, selection, and strategy matter more than simply buying passive exposure.
Please consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. Contact us at 1-888-383-0553 or visit www.virtus.com for a copy of the Fund's prospectus. Read the prospectus carefully before you invest or send money.
Morningstar Disclosures: The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Ratings do not take into account the effects of sales charges and loads. © 2025 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. A fee was paid to Morningstar to license the use of the Stars, Rankings, and Ratings.
Exchange-Traded Funds (ETF): The value of an ETF may be more volatile than the underlying portfolio of securities it is designed to track. The costs to the portfolio of owning shares of an ETF may exceed the cost of investing directly in the underlying securities. Preferred Stocks: Preferred stocks may decline in price, fail to pay dividends, or be illiquid. Leverage: When the Fund leverages its portfolio, the Fund may be less liquid and/or may liquidate positions at an unfavorable time, and the value of the Fund’s shares will be more volatile and sensitive to market movements. Non-Diversified: The portfolio is not diversified and may be more susceptible to factors negatively impacting its holdings to the extent the portfolio invests more of its assets in the securities of fewer issuers than would a diversified portfolio. Market Price/NAV: At the time of purchase and/or sale, an investor’s shares may have a market price that is above or below the fund’s NAV, which may increase the investor’s risk of loss. Market Volatility: The value of the securities in the portfolio may go up or down in response to the prospects of individual companies and/or general economic conditions. Local, regional, or global events such as war or military conflict, terrorism, pandemic, or recession could impact the portfolio, including hampering the ability of the portfolio’s manager(s) to invest its assets as intended. Prospectus: For additional information on risks, please see the fund’s prospectus. PFFA, PFFR, and AMZA are distributed by VP Distributors, LLC, member FINRA and subsidiary of Virtus Investment Partners, Inc.
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The information contained herein represents our subjective belief and opinions and should not be construed as investment, tax, legal, or financial advice. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. Please read the prospectus carefully before investing. For more information about the Fund, Fund strategies or Infrastructure Capital, please reach out to Craig Starr at 212-763-8336 (Craig.Starr@icmllc.com). The Funds are distributed either by Quasar Distributors, LLC or by VP Distributors, LLC, an affiliate of Virtus ETF Advisers, LLC. ICAP, SCAP, and BNDS ETFs are distributed by Quasar Distributors LLC. PFFA, PFFR, and AMZA ETFs are distributed by VP Distributors, LLC an affiliated of Virtus ETF Advisers, LLC.