NYSEARCA:PFFA – A 9%+ Dividend Yield and 13% Upside, But Can It Hit $25?

Virtus InfraCap U.S. Preferred Stock ETF (NYSEARCA:PFFA) – Is There a Path to $25?

NYSEARCA:PFFA’s High-Yield Strategy and Market Performance

Virtus InfraCap U.S. Preferred Stock ETF (NYSEARCA:PFFA) stands out in the preferred stock ETF space with its aggressive approach to generating high monthly income. Offering an 11.64% trailing 12-month dividend yield, PFFA delivers one of the highest payout rates among its peers. This fund currently holds an AUM of $1.50 billion and employs an actively managed strategy that utilizes 20-25% leverage to enhance returns. However, the 2.52% expense ratio raises concerns, as it is significantly higher than passive preferred stock ETFs like PFF (0.46%), PGX (0.51%), and PFFD (0.23%).

PFFA’s performance has been a mixed bag. While it has outperformed passive preferred stock ETFs, it has also experienced significant volatility due to interest rate fluctuations. Since its inception, the fund is down 12% in total return, highlighting the impact of capital depreciation. However, the active strategy has helped mitigate losses better than purely passive funds by actively managing Yield to Call (YTC) risks, reducing exposure to overvalued preferred securities, and taking advantage of opportunistic entry points in new preferred issues.

Why NYSEARCA:PFFA is Different from Passive Preferred ETFs

Unlike traditional passive ETFs that track indexes such as the S&P U.S. Preferred Stock Index, PFFA actively rotates its holdings based on interest rate trends, call risks, and issuer fundamentals. This dynamic approach allows it to adjust to market conditions faster than funds like PFF, PGX, or PFFD, which remain fully exposed to broader interest rate risk.

One of PFFA’s primary differentiators is its ability to capitalize on new preferred stock issuances. The fund’s management has emphasized that it actively seeks undervalued preferred securities, particularly when interest rate expectations shift. With the Federal Reserve signaling potential rate cuts in 2025, the opportunity to lock in higher-yielding preferred issues while avoiding lower-rate legacy securities becomes crucial.

Another key distinction is the 20-25% leverage PFFA employs, which amplifies returns but also increases risk. This leverage enhances dividend distributions, pushing yields above 9%, even in a declining rate environment. However, leverage cuts both ways—during downturns, losses are magnified, as seen during the COVID crash.

Rate Cut Expectations and the Potential for Capital Gains

With the Federal Reserve signaling a gradual reduction in interest rates following an aggressive rate hike cycle, preferred stocks stand to benefit. Preferred securities, which are highly sensitive to interest rate movements, could see significant capital appreciation as yields compress and market valuations adjust.

PFFA currently trades at $22 per share, while most preferred stocks have a par value of $25. If interest rates decline, the spread between market price and par value should narrow, potentially lifting PFFA’s price closer to $25. This would represent a 13.6% upside, in addition to the 9%+ annual dividend yield investors are collecting.

Portfolio Allocation and Sector Exposure

PFFA’s top holdings are concentrated in financials, real estate, and mREITs, which collectively make up 70% of the portfolio. These sectors tend to be interest rate-sensitive, meaning their performance is closely tied to changes in Federal Reserve policy.

Financials benefit from a normalizing yield curve, as banks see loan profitability improve while deposit costs stabilize. Real estate investment trusts (REITs) and mortgage REITs (mREITs), which are known for their high leverage, tend to perform better in declining rate environments since borrowing costs are reduced.

PFFA also limits individual issuer exposure, ensuring no single position exceeds 3% of the portfolio, while no single issuer exceeds 5%. This diversification helps reduce credit risk, though the fund remains highly correlated with the broader preferred stock market.

The Role of Technical Analysis in Managing PFFA Volatility

One unique aspect of PFFA compared to other income-focused ETFs is the ability to apply technical analysis to entry and exit points. Because of its high volatility and active management, certain technical indicators—such as Relative Strength Index (RSI) levels—can be used to identify optimal buying zones.

Historically, PFFA has formed bottoming patterns around oversold RSI conditions, particularly when macroeconomic conditions are supportive. In four out of the last four major downturns, entering PFFA when RSI was below 30 resulted in strong subsequent recoveries.

For investors looking to reduce exposure at peaks, tracking negative breakouts could signal when to trim positions, especially if interest rate expectations shift negatively.

Risks That Could Derail PFFA’s Upside Potential

Despite the bullish case for PFFA, there are several risks to consider.

One major concern is the potential for a recession, which could increase credit risk for financial institutions and REITs—two of PFFA’s largest sector exposures. A sharp economic slowdown could lead to dividend cuts among preferred issuers, negatively impacting both income stability and capital appreciation prospects.

Another risk is the potential return of inflationary pressures, which could force the Federal Reserve to hold rates higher for longer. If rate cuts are delayed, preferred stock valuations may remain depressed, limiting PFFA’s upside potential.

Lastly, PFFA’s leverage remains a double-edged sword. While it enhances dividends and capital gains in rising markets, it can magnify losses in downturns. Investors must be comfortable with higher volatility, as evidenced by PFFA’s sharp declines during previous rate spikes.

Buy, Hold, or Sell – Is PFFA Worth the Risk?

PFFA is an attractive option for income investors seeking high monthly dividends, but it comes with elevated risks due to its leverage and interest rate sensitivity. The potential for capital appreciation as preferred stocks approach their $25 par value makes it a compelling buy at current levels.

With Federal Reserve rate cuts on the horizon, preferred stocks stand to gain, and PFFA could benefit disproportionately due to its active management and ability to capture new issuance opportunities. If PFFA’s market price moves toward $25 per share, investors could see double-digit total returns in 2025 and beyond.

However, those investing in PFFA should have a clear exit plan, particularly if macro conditions shift negatively. Given the fund’s strong yield and potential for upside, a target exit price of $25 seems reasonable, balancing income generation with capital preservation.

For those comfortable with higher volatility and willing to hold through market fluctuations, NYSEARCA:PFFA remains a high-yield opportunity with strong upside potential.

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