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October 2023 Update: Preferred Stock Primer PLUS Key Benefits & Risks


Preferred Stock Primer

Preferred Stock Primer Overview

What Are Preferred Stocks?

Preferred Stock - Traditional Capital Structure
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Preferred stocks (“preferreds") are hybrid equity securities with characteristics similar to debt instruments Like bonds and other fixed-income instruments, preferreds are senior to common equity in a company’s capital structure and are offered with dividend payments


For investors looking for above-average yields in investment grade offerings, preferreds can be a core component within a diversified, income-focused portfolio.


Types of Preferred Stocks

Cumulative: Unpaid dividends accrue and must be paid before dividends can be paid to common shareholders

Callable: Securities are usually callable at par at a future date

Convertible: Shares can be convertible into common stock at a set ratio at the issuer's option at a specified date in the future


Preferred Stock Primer Stocks vs. Common Equity

Dividends

  • Preferred stock dividends are fixed or floating

  • Dividends to preferred shareholders must be current before dividends are paid to common stock shareholders

Capital Structure

  • Preferred equity is junior to all classes of debt and consequently, would be disadvantaged in a bankruptcy

Voting Rights

  • Preferred stocks do not have voting rights and preferred holders are compensated for this in the form of higher dividends


Issuer Ratings

  • Similar to credit offerings, preferred offerings are rated by S&P, Moody’s, and other rating agencies

Capital Structure

  • Being subordinate to debt, preferreds distributions are made after all interest payments are made on the debt obligations

  • A company can suspend preferred dividends whereas suspension of interest payments may trigger legal action by debtholders and cause potential reorganization or bankruptcy


Interest Rate Sensitivity

  • Preferreds are substantially less sensitive to interest rate swings than debt instruments

  • Credit spreads may act as a buffer for capital loss in a rising interest rate environment

Accessibility & Liquidity

  • The size and trading volume of the US preferred market offers liquidity

  • Large, passive ETFs create opportunities for active managers



Note: 15-year default rate provided by Moody's. U.S. Preferred Securities rate is 0.3%.



Risks of Preferred Stocks

Call Risk

  • Preferreds are often issued with a specified call date

  • A substantial portion of the universe may trade at a negative yield to call (YTC), meaning that the security is callable at par but trading above par in the open market

Active management can minimize call risk and avoid negative YTC securities


Credit Risk

  • Preferred issuers can suspend preferred payments in times of financial uncertainty

  • Preferred issues can be offered without a rating

Active management can monitor financial positioning and trade in/out of securities to avoid risky issuers


Interest Rate Risk

  • Like bonds, rising interest rates negatively impact the value of fixed-rate preferred securities

Active management can diversify preferred holdings across fixed and fixed to floating rate securities to mitigate interest rate risk


Yield to Call as of 09/30/2023 for Preferred Stock Index, US Treasury Index, Corporate investment grade index, High yield indes, and PFFA ETF

 

Fund Risks

Please consider the Fund’s investment objectives, risks, charges, and expenses carefully before investing. Contact VP Distributors LLC at 1-888-383-4184 or visit https://www.virtus.com/products/virtus-infracap-us-preferred-stock-etf#shareclass.742/period.quarterly to obtain a prospectus that contains this and other information about the Fund. The prospectus should be read carefully before investing.


Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities.

Preferred Stock: Preferred stocks may decline in price, fail to pay dividends, or be illiquid.

Industry/Sector Concentration: A fund that focuses its investments in a particular industry or sector will be more sensitive to conditions that affect that industry or sector than a non-concentrated fund.

Market Volatility: Securities in the Fund may go up or down in response to the prospects of individual companies and general economic conditions. Price changes may be short or long-term.

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.

Short Sales: The Fund may engage in short sales, and may experience a loss if the price of a borrowed security increases before the date on which the fund replaces the security.

Leverage: When a fund leverages its portfolio, the value of its shares may be more volatile and all other risks may be compounded.

Derivatives: Investments in derivatives such as futures, options, forwards, and swaps may increase volatility or cause a loss greater than the principal investment.

No Guarantee: There is no guarantee that the portfolio will meet its objective.

Prospectus: For additional information on risks, please see the Fund's prospectus.

Indices Used: Treasury (LUATTRUU Index), Corporate Investment Grade (LUACTRUU Index), Preferreds (SPTREFTR Index, PFF Equity), Corporate High Yield (LF98TRUU Index). Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses, or sales charges.


Default Rates: Default rates are compiled using Moody’s Investor Services

Yields: Yield information displayed in the chart is calculated based on Bloomberg data as of 09/30/2023. Yield information for the InfraCap US Preferred ETF is based on Bloomberg’s Dividend Indicated Yield, which is the most recently announced gross dividend, annualized based on the dividend frequency, and then divided by the current market price. Yield information for the LUACTRUU Index and LF98TRUU Index is calculated based on Bloomberg’s yield-to-maturity formula, which is the market value-weighted average yield to maturity for the index. Yield information for the LUATTRUU Index is calculated based on Bloomberg’s yield-to-worst formula, which is the market value-weighted average yield-to-worst for the index.

Data and Opinions: This data was 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.


Performance Data: Performance data quoted backtested results. Backtested Performance was derived from the retroactive application of a model developed with the benefit of hindsight. Backtested performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. Please visit https://www.virtus.com/products/virtus-infracap-us-preferred-stock-etf#shareclass.742/period.quarterly for performance data current to the most recent month-end.


NAV Returns: NAV returns are calculated using the Fund’s daily 4:00 p.m. 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 4:00pm bid/offer midpoint on distribution ex-date). Market price returns do not represent the return you would receive if you traded at other times.

Virtus ETF Advisers, LLC serves as the investment advisor and Infrastructure Capital Advisors, LLC serves as the sub-advisor to the Fund. The Fund is distributed by VP Distributors LLC, an affiliate of Virtus ETF Advisers, LLC.

© 2023 Infrastructure Capital Advisors, LLC




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