PFFR: A Fully Covered Strong And Steady-Yielding REIT Preferred Stocks ETF (NYSEARCA:PFFR)

~ by Snehasish Chaudhuri, MBA (Finance).

ETFis Series Trust I – InfraCap REIT Preferred ETF (NYSEARCA:PFFR) is an exchange-traded fund (“ETF”) launched and managed by Virtus ETF Advisers LLC. The fund invests in preferred securities of United States based real estate investment trusts. PFFR offers investors a strong, fully-covered current 7.86 percent dividend yield, moderately higher than that of most preferred shares ETFs. The fund’s assets are invested in a concentrated manner, which increases risk and volatility of its portfolio.

But, overall, PFFR is one of the safer high-yield ETFs available in the market. Preference shares in general, are less risky than equity shares as all payments to preferreds are made before any payments to common equity holders. Moreover, its strong, stable, fully-covered yield offers significant incentive for shareholders. This is an income vehicle, which suits income-seeking investors.

InfraCap REIT Preferred ETF Offers Quite Strong Yield, That is Fully Covered

InfraCap REIT Preferred ETF is co-managed by Infrastructure Capital Advisors, LLC. The fund primarily invests in preferred securities issued by REITs, and seeks to replicate the performance of the Indxx REIT Preferred Stock Index. It is a market-cap weighted index, with certain rules to ensure diversification. This index composes securities only with yields higher than 3 percent. The fund was formed in February 2017 and has been paying monthly dividends since then. It has a six-year average yield of 6.4 percent that is fully covered by the coupons. Weighted average coupon earned by this fund is almost 6.5 percent. PFFR’s portfolio has an effective duration of 20.9 years, suggesting the same coupon to continue.

The fund is non-diversified, but well-spread out among over 100 securities. Top 10 investments of InfraCap REIT Preferred ETF account for only 21 percent of its total assets. Although half of these top holdings are mortgage REITs (real estate investment trusts), overall, the majority of PFFR’s exposure is in property or equity REITs. Among the top investments, PFFR’s portfolio includes preferred stocks of Annaly Capital Management, Inc. (NLY), Digital Realty Trust, Inc. (DLR), DigitalBridge Group, Inc. (DBRG), Vornado Realty Trust (VNP), Kimco Realty Corp (KIM), AGNC Investment Corp. (AGNCP), National Storage Affiliates Trust (NSA), UMH Properties, Inc. (UMH), The Necessity Retail REIT, Inc. (RTL), Hudson Pacific Properties, Inc. (HPP), Public Storage (PSA), SL Green Realty Corp. (SLG), Hersha Hospitality Trust (HT), and Pebblebrook Hotel Trust (PEB).

Why Investing in Preferred Shares and Related Funds Benefits Investors

Preferred shareholders enjoy a seniority in the time of dividend payment over common equity holders, but they are paid only after the interest payment on debt securities. These shares also have a preferred share over the organization’s assets during the event of liquidation. Due to fixed payout, preferred share shares generally generate a higher yield than that of equity shares. Like common equity shares, preferred shares are also issued to retail investors and are traded on major stock exchanges.

Collectively, the market for preferred shares has increased multiple times during the past two decades and is valued approximately at $1 trillion. However, despite such historically high growth, traditional investors often stay away from preferred stocks. The same trends can be seen in case of preferred share ETFs, too.

Should Investors Consider Investing in PFFA over InfraCap REIT Preferred ETF?

A comparison can be made between PFFR and another infrastructure preferred stock ETF launched and managed by Virtus ETF Advisers LLC., namely ETFis Series Trust I – Virtus InfraCap U.S. Preferred Stock ETF (PFFA). PFFA has assets under management, or AUM, of almost $583 million, which it invests in preferred share shares of United States-based infrastructure-related companies. PFFA benchmarks itself against the S&P U.S. Preferred Stock Index. This fund also pays a monthly dividend but generates a higher yield than PFFR. Current yield of PFFA is 9.38 percent, while annual average yield during the past 5 years has been almost 9.4 percent. Infrastructure is generally considered a stable sector that delivers growth over the long run. Looking at these above figures, income-seeking investors might find PFFA much more attractive than PFFR.

However, most of PFFA’s top holdings are relatively unknown names, such as Crestwood Equity Partners LP (CEQP), RLJ Lodging Trust (RLJ), DCP Midstream, LP (DCP), Babcock & Wilcox Enterprises, Inc. (BW), The Necessity Retail REIT, Inc. (RTL), NuStar Energy L.P. (NS), etc. Moreover, the high yield of Virtus InfraCap U.S. Preferred Stock ETF is not covered. Weighted average annual coupon income generated by PFFA’s portfolio is only 6.48 percent. This makes PFFA a riskier fund, at least riskier than PFFR. Unfortunately, PFFA’s portfolio too, has an effective duration of 20.9 years, suggesting the same coupons to continue. Moreover, this fund has a quite high expense ratio of 1.4 percent, compared to 0.45 percent of PFFR. Thus I’d suggest income-seeking investors give higher preferred share to InfraCap REIT Preferred ETF over PFFA.

Investment Thesis

The hybrid nature of preferred stocks makes these securities a little unattractive. With rising interest rates, investors are a little bit skeptical about the yield of these preferred stocks. However, various other incentives provided by these securities can be helpful for reducing sensitivity towards changes in interest rates. PFFR’s attractiveness relies primarily on its 6.4 percent average yield. This is a relatively strong yield, and higher than that of most other ETFs. More importantly, this yield is fully covered, and can be considered sustainable. Stable dividend is also indicative of reasonably higher quality of holdings. Steady dividend payout on monthly basis and low expense ratio also suggests that this fund is less risky.

The PFFR fund is less risky than similar types of preferred share ETFs. I would thus reiterate that income-seeking investors should consider investing in ETFis Series Trust I – InfraCap REIT Preferred ETF.