Preferred stocks can offer investors a dual benefit: a steady income stream and the potential for share price appreciation. They often provide higher yields than common stocks and bonds, may pay tax-advantaged dividends, and typically have low correlations to traditional asset classes, making them an attractive option for income-focused investors. In a climate of high interest rates and persistent inflation, preferreds allow investors to earn current dividend income and potentially benefit from price gains if rates decline. They also serve as a diversification tool within a modern investment portfolio.
However, preferred stocks come with inherent risks that can be challenging for untrained investors. Call risk is a primary concern: if an issuer redeems shares at a preset call price, investors may face a sudden loss of income and be forced to reinvest at lower yields. Those who purchased above the redemption price could incur capital losses. Concentration risk is another issue, as investors may become overly exposed to a single sector or to interest rate fluctuations. Rising rates can erode the market value of preferred stocks as newer issues offer higher yields. Additionally, issuers may suspend dividend payments during financial stress.
Given these complexities, passive funds often fall short of optimal outcomes. Active management may provide the necessary finesse to handle the unique challenges of the preferred stock asset class. The Virtus InfraCap U.S. Preferred Stock ETF (NYSE: PFFA) is an actively managed ETF with over $2 billion in assets under management as of September 11, 2026. It invests in a diversified basket of preferred stocks that is less concentrated in financials and more weighted in sectors like real estate and utilities, aiming for diversification while maintaining attractive income generation.
PFFA employs a low band of leverage (with no daily reset) to potentially enhance diversification, income, and total return. For example, if the Federal Reserve raises interest rates, Jay D. Hatfield, founder, CEO, and portfolio manager at Infrastructure Capital Advisors, can quickly increase exposure to floating, fixed-to-floating, or other higher-yielding securities and harvest gains in less-desirable holdings. This dynamic positioning contrasts with passively managed preferred funds, which track an index and rebalance infrequently, potentially taking months to adjust to changing market conditions.
Hatfield brings nearly three decades of experience in investment banking, hedge fund management, and portfolio construction. He can adjust PFFA to overweight sectors offering higher yields or better risk-adjusted returns while underweighting stressed sectors like financials during crises. To address call risk, PFFA monitors call dates daily to minimize exposure to callable securities trading above par, seeking to preserve capital and capture profits before redemptions. The fund also mitigates interest rate risk by diversifying between fixed-rate and fixed-to-floating-rate securities.
PFFA seeks total return and high current income by arbitraging gaps that emerge when floating preferreds trade in line with fixed-rate parity issues, when fixed-to-floating preferreds are converting at higher coupon rates, and when management is encouraged to call floating preferreds at par when rates are high. These strategies are not typically available in passive preferred ETFs or mutual funds.
To guard against issuer default on dividend payments, the portfolio management team continuously assesses issuers’ financial health and monitors portfolio concentrations daily. If a company is not well-positioned, the fund can limit exposure or sell preferred shares of struggling companies.
Beyond risk management, Hatfield and his team actively seek market opportunities. The fund can invest in newly issued preferred securities before they are included in indices, identify opportunities where credit profiles improve, or premiums are offered for redemption during mergers and acquisitions. PFFA can use leverage and deploy capital when markets are depressed, and it may purchase preferred shares when they trade at a discount—something passive funds may not do.
Preferred shares offer the potential for higher yield and appreciation, but they are not without risk. While passive funds provide exposure, they may not navigate the challenges as effectively as an actively managed fund. The Virtus InfraCap U.S. Preferred Stock ETF (PFFA) has over $2 billion in assets under management in a diverse basket of preferred stocks. To learn more, click here.
