A structurally flawed benchmark index has proven a fertile ground for active managers.
- Preferred stock ETFs are predominately passively managed funds. Index-based strategies hold about 85% of the more than $31 billion of AUM in ETFs, and over $16 billion is concentrated in the largest passively managed ETF, which has underperformed the Morningstar Preferred Stock Category average and placed in the bottom quartile of the category for the 1-, 3-, 5- and 10-year periods through 8/31/19.1
Four of the 14 preferred stock ETFs are actively managed. Only one seeks to maximize yield-to-call, using modest leverage and an option strategy to enhance income which offers the potential for above-average current income.
- In addition to offering attractive income potential, preferred stocks have provided diversification and lower correlation benefits.
ACTIVE MANAGEMENT HAS TRUMPED PASSIVE PREFERRED STOCK FUNDS: GROWTH OF $100*
Morningstar Preferred Stock Category averages, actively managed vs. passive strategies, from the largest ETF’s inception, 3/26/07-6/30/19.
Past performance is no guarantee of future results.
* Source: Morningstar. As of 6/30/19. U.S. Active Fund Preferred Stocks includes only active funds and ETFs, while U.S. Passive Fund Preferred Stock includes only passive funds and ETFs in the broader Morningstar Preferred Stock Category. There are eleven preferred stock ETFs in the passive fund preferred stock category, PFF is the largest. Investment objectives, fees, risks, benchmarks, and vehicles may vary. Like indexes, the aforementioned Morningstar Preferred Stock Categories are unmanaged, but their returns do reflect fees. The categories mentioned do not reflect sales charges, and are not available for direct investment nor are they meant to represent the performance of the security described in this paper. Performance is not illustrative of the Virtus InfraCap U.S. Preferred Stock ETF performance, which can be found by visiting virtus.com.
The commentary is the opinion of InfraCap Advisors. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
INDEX AND INVESTMENT TERM DEFINITIONS
The Morningstar Preferred Stock category represents funds that invest in the preferred stock market. Preferred stocks are a class of capital stock that pays dividends at a specified rate and has a preference over common stock in the payment of dividends and the liquidation of assets.
The S&P U.S. Preferred Stock Index measures performance of the U.S. preferred stock market. Preferred stocks pay dividends at a specified rate and receive preference over common stocks in terms of dividend payments and liquidation of assets. The index is calculated on a total return basis with dividend reinvested. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and is not available for direct
investment. The ICE Exchange-Listed Preferred & Hybrid Securities Index measures the performance of a select group of exchange-listed, U.S. dollar-denominated preferred securities, hybrid securities, and convertible preferred securities listed on the New York Stock Exchange (“NYSE”) or NASDAQ Capital Market (“NASDAQ”). The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and is not available for direct investment. The iShares 20+ Year Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years.
Call Provision: A stipulation on the contract for a security that allows the issuer to repurchase and retire the security. Correlation to Index: The performance of the fund and its index may vary somewhat due to factors such as fund flows, transaction costs, and timing differences associated with additions to and deletions from its index. Mandatory Convertibles: A type of security that has a required conversion or redemption feature. Either on or before a contractual conversion date, the holder must convert the mandatory security into the underlying common stock. Preferred Stock: This class of stock entitles the owners to a dollar value per share in liquidation, after bond holders are paid. It also has a fixed dividend and priority over common shares. Preferred shares usually have voting rights when dividend payments have been missed. They are generally considered income investments. Yield-to-Call: Refers to the return a bondholder receives if the security is held until the call date, before the debt instrument reaches maturity.
IMPORTANT RISK CONSIDERATIONS
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 of owning the 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 a fund leverages its portfolio, the value of its shares may be more volatile and all other risks may be compounded. Options: Selling call options may limit the opportunity to profit from the increase in price of the underlying asset. Selling put options risks loss if the option is exercised while the price of the underlying asset is rising. Buying options risks loss of the premium paid for those options. Non-Diversified: The fund is non-diversified and may be more susceptible to factors negatively impacting its holdings to the extent that each security represents a larger portion of the fund’s assets. 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. Prospectus: For additional information on risks, please see the fund’s prospectus.
The Fund is an exchange-traded fund (“ETF”). The “net asset value” (NAV) of the Fund is determined at the close of each business day, and represents the dollar value of one share of the Fund; it is calculated by taking the total assets of the Fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV of the Fund is not necessarily the same as its intraday trading value. Fund investors should not expect to buy or sell shares at NAV because shares of ETFs such as the Fund are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Thus, shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns. NAV returns are calculated using the Fund’s daily 4:00 pm NAV, and include the reinvestment of all dividends and other distributions (reinvested at the Fund’s NAV on distribution ex-date). Market price returns are calculated using the 4:00 pm midpoint between the bid and offer, and include the reinvestment of all dividends and other distributions (reinvested at the 4:00 pm bid/offer midpoint on distribution ex-date). Market
price returns do not represent the return you would receive if you traded at other times. The Fund is an actively managed exchange-traded fund and does not seek to replicate the performance of a specified index. The Fund may have a higher portfolio turnover than funds that seek to replicate the performance of an index.
Please consider the Fund’s objectives, risks, charges, and expenses before investing. Contact us at 1.800.243.4361 or visit www.virtus.com for a prospectus, which contains this and other information about the Fund. Read the prospectus carefully before investing.
Not insured by FDIC/NCUSIF or any federal government agency. No bank guarantee. Not a deposit. May lose value.
Distributed by ETF Distributors, LLC, an affiliate of Virtus ETF Advisers LLC.
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