Why NYSEARCA:PFFA ETF is a Top Income Investment with 10.3% Yield

NYSEARCA:PFFA ETF Analysis: Strong Buy with Over 10% Yield

Virtus InfraCap U.S. Preferred Stock ETF (NYSEARCA:PFFA) has been gaining traction for its solid and consistent income generation through investments in high-quality U.S. preferred stocks. With a current yield of 10.3%, this fund remains a top choice for income-seeking investors. Despite recent market fluctuations, PFFA continues to prove its stability, offering investors a reliable and predictable income stream even during turbulent times. Given the current market dip and PFFA's performance, this presents an excellent opportunity to buy into the fund at a discount.

High Yield, Low Risk: The Core of PFFA’s Strategy

The NYSEARCA:PFFA ETF focuses on preferred stocks, a unique class of investment that sits between bonds and common stocks. Preferred stocks offer higher yields than common stocks and come with less volatility compared to common stock, making them attractive to income investors. This is especially true for PFFA, which concentrates on U.S. companies with strong market caps of over $100 million, ensuring liquidity and quality. By investing in this niche, PFFA targets companies that offer substantial, stable dividends, often senior to common stock in the event of liquidation.

PFFA’s investment strategy involves strict qualitative and quantitative screening of preferred stock investments. This process excludes high-risk or low-liquidity stocks, focusing solely on those that provide reliable income potential. Moreover, the fund employs a modest amount of leverage (20-30%) to amplify income generation while maintaining a conservative risk profile.

Performance of PFFA: Consistency Amid Market Volatility

Despite the broader market downturn, PFFA has remained relatively stable, demonstrating resilience and a remarkable ability to rebound after market dips. As of now, PFFA is trading around 9% off its highs, presenting a fantastic entry point for investors looking to capitalize on the dip. Over the years, PFFA has consistently delivered stable monthly dividends, returning $0.17 per share per month since 2024, with a steady increase in payouts from $0.1625 in 2022 to $0.1675 in 2024. This growth in dividends aligns with the fund's commitment to delivering robust income to shareholders.

In terms of total returns, PFFA has shown less volatility compared to broader indices like the S&P 500, with a decline of approximately -6.5% year-to-date. However, given its 10%+ yield, PFFA continues to provide attractive returns relative to its peers.

Why Buy the Dip in PFFA Now?

The recent market correction has affected PFFA, but the fund's unique structure and preferred stock allocation make it an ideal candidate for a buy-the-dip strategy. Preferred shares tend to trade near their par value, so market fluctuations often present opportunities for investors to purchase these shares at a discount, especially when forced sales occur in a market downturn. Historically, PFFA has shown that buying in during these dips results in strong subsequent returns, often between 24% and 32% within a year of the price retracement.

For example, during the 2020 crash, PFFA saw a 50% drawdown from its all-time highs, yet those who bought in at that point saw an average 132.35% return in the following year. Given that PFFA is down around 9% from its highs, investors could see similar returns in the next 12 months, especially when factoring in its elevated dividend yield.

Underlying Risks and Considerations

As with any investment, there are risks involved with PFFA. The fund’s preference for preferred stocks offers protection in the event of a company’s insolvency, but it is still subject to the overall market’s fluctuations. The fund’s reliance on preferred stocks, which are susceptible to call risk, means that issuers can buy back their securities when the yield dynamics become unfavorable. This is a crucial factor that limits upside potential for PFFA in times of falling interest rates.

Another potential risk to PFFA’s yield stability comes from the real estate sector, which accounts for about 40% of the fund’s holdings. While real estate has been a reliable income generator, it remains vulnerable to changes in interest rates, especially in a rising rate environment. Fortunately, the current interest rate outlook suggests that the Fed may lower rates soon, which would benefit PFFA by reducing borrowing costs for its leveraged position and supporting real estate valuations.

Market Conditions and PFFA’s Future Outlook

Looking ahead, PFFA is well-positioned to take advantage of the market’s current dynamics. The Fed's potential interest rate cuts are expected to benefit the fund, especially given its exposure to real estate and utilities sectors, which are sensitive to interest rate changes. If the Fed cuts rates in May 2025, it would provide a boost to PFFA’s portfolio, enhancing its yield stability and increasing the attractiveness of the fund’s underlying assets.

Additionally, the fact that PFFA has a relatively low leverage ratio compared to other funds in the same space offers it a buffer against market turbulence. Its conservative leverage strategy helps it maintain a balance between enhancing returns and controlling risk.

Conclusion: Is PFFA a Buy at This Price?

Given the current market conditions, PFFA presents a strong opportunity for investors seeking high, stable income. With a 10.3% yield, solid fundamentals, and a strong track record of stability, the fund is well-suited for income-focused portfolios. Despite recent market volatility, PFFA remains a reliable source of income, and its current dip presents a compelling entry point for long-term investors. At current levels, PFFA appears to be significantly undervalued, with the potential for 24% to 32% returns over the next year, primarily driven by its attractive dividend yield and strong mean-reverting price action.

For those seeking a consistent income stream with a strong margin of safety, PFFA is a Strong Buy at this point, offering a solid opportunity to add a high-quality, income-generating asset to your portfolio.

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