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Quarterly Commentary - Virtus InfraCap U.S. Preferred Stock ETF

Writer's picture: InfraCap ManagementInfraCap Management


Market Overview

The domestic macroeconomic outlook was a function of an international war, rising

interest rates, persistently high commodity prices, and a heightened sensitivity to

inflation. High inflation data, low unemployment rates, large wage gains, and tailwinds

from businesses reopening and increased travel have all supported the rationale behind interest rate hikes and quantitative tightening in 2022. Despite geopolitical risks, the predominate market risk is the impact of the Federal Reserve’s (Fed) conclusion of its asset purchase program (liquidity risk) and subsequently whether it sticks to its targeted rate hikes plan in 2022 (impact on valuation, liquidity, and growth). We still believe the Fed has lost control over inflation and forecast that true run-rate inflation is currently over 10%. In contrast to the past decade, the Fed has transitioned to a predominately hawkish focus on reducing inflation. Divergences on

credit still persist as lower-rated, higher-yielding credits outperform on correlation to equity markets and higher-rated, lower-yielding credits underperformed on correlation to Treasury yields.


How The Fund Performed

For the quarter, the Fund returned -10.87% at NAV, while the Fund’s benchmark, the S&P U.S. Preferred Stock Index (Benchmark Index), returned -8.09%. The Fund paid a monthly dividend of $0.1625 per share for each month of the quarter, while NAV at quarter-end was $20.92. As of quarter-end, the Fund had a 30-Day SEC Yield1 of 9.85%. This annualized figure reflects the distributions and dividends received

during the period, after the deduction of Fund expenses. The Fund maintained large overweight positions in the real estate and industrial sectors relative to the Benchmark Index. Our view is that the yield and credit profiles of these sectors are more attractive than the financial sector. At the end of the quarter, the real estate allocation was 26.5%, compared to 8.4% for the Benchmark Index, and the

allocation to the industrial sector was 13.6% versus 3.3% for the Benchmark Index. The Fund’s underweight to the financial sector is substantial, with a weighting of 5.6% compared to 66.1% for the Benchmark Index. We believe the real estate and industrial

sectors are best positioned for higher yields and total returns. The Fund ended the

quarter with leverage of 29.0% of net asset value, in line with the trailing twelve-month

average. The Fund has a 50.0% weighting in fixed-to-floating-rate preferred shares.

The Fund expects to pay a monthly dividend of $0.1625 per share. The Fund’s strategy of

maximizing yield-to-call (YTC) generated substantial optimization profits during the quarter.

The use of leverage also contributed to the amount of income available for distribution.


Portfolio Changes

We increased our holdings in Algonquin Power & Utilities. Algonquin Power

& Utilities is a renewable power generation company that owns sustainable

infrastructure assets across North America.


Outlook

Despite tailwinds from the reopening of the U.S. economy in 2021, the predominate market

risk is the impact of the Fed’s conclusion of its asset purchase program (liquidity) and

subsequently whether it sticks to its targeted rate hikes plan in the second half of 2022. We

still believe the Fed has lost control over inflation and forecast that true run-rate inflation is

currently over 10%.

In 2021, legislators removed corporate tax rate increases and scaled back other taxes in

recent proposed legislation, which was positive for the market in 2022. Corporate tax rates

are 33%, negatively correlated with growth globally. However, recent proposed tax increases,

projected interest rate increases, and the suspension of stimulus payments may slow

economic growth in 2022. As a result, we have continued to diligently add issuers with

higher liquidity and credit quality. Further, we’ve increased both the yield and YTC of the

portfolio in anticipation of a rising interest rate environment.

Additionally, the vaccine rollout has continued to progress with increased availability of

booster vaccines. As of July 6, 2022, approximately 78.3% of the U.S. population has

received at least one dose and 66.9% is fully vaccinated.

Based on our relative value quantitative and qualitative screens, we continue to add

issuers with high liquidity credit quality. We believe that the historically expansive monetary

policy implemented by the Fed has quelled short-term liquidity concerns that may return

in 2022. In the long term, macroeconomic headwinds in the form of rising interest rates,

tightening liquidity, increasing commodity prices, and inflation pressures are risks that we

continue to monitor.

To reiterate, we expect market uncertainty to continue in 2022 as inflation remains high,

Fed policy transitions toward tightening, and interest rates rise. As individual preferred issues

continue to recover and trade closer to par, we look to opportunistically add new issues to

maintain an above-average YTC versus the Benchmark Index.




For full commentary, portfolio details and charts, go to: Quarterly Commentary - Virtus InfraCap U.S. Preferred Stock ETF



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DISCLOSURE

Opinions represented on this website are subject to change and should not be considered investment advice. Past performance is not indicative of future results. This data was prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed.

Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus with this and other information about the InfraCap Small Cap Income ETF, please click here. Please read the prospectus carefully before investing. For more information, please reach out to William Heffernan at 212-763-8326 or icap-operations@infracap-funds.com.

 

The Funds are distributed either by Quasar Distributors, LLC or by VP Distributors, LLC, an affiliate of Virtus ETF Advisers, LLC. ICAP and SCAP ETFs are distributed by Quasar Distributors LLC. PFFA, PFFR, and AMZA ETFs are distributed by VP Distributors, LLC an affiliated of Virtus ETF Advisers, LLC.

Current income is a primary objective in most, but not all, of ICA's investing activities. Consequently, the focus is generally on companies that generate and distribute substantial streams of free cash flow. This approach is based on the belief that tangible assets that produce free cash flow have intrinsic values that are unlikely to deteriorate over time. For more information, please visit infracapfunds.com.

 

The Russell 2000 Index is a small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. It is not possible to invest directly in an index. In addition, there is a highly liquid option market according to total option volumes, as of December 8, 2023 *Morningstar ratings are based on risk-adjusted returns. Strong ratings are not indicative of positive fund performance. Morningstar Rating: Five star ranking awards for three year performance was prepared by Morningstar, an independent third party. As of 09/30/2023, PFFA was rated 5 stars out of 64 funds, 1 stars out of 58 funds and has no rating out of 38 funds within the US Fund Preferred Stock category for the 3-, 5- and 10 year periods, respectively. As of 09/30/2023, AMZA was rated 5 stars out of 100 funds, 1 stars out of 91 funds and no rating out of 0 funds within the Energy Limited Partnership category for the 3-, 5- and 10 year periods, respectively. These ratings are not indicative of a fund's future results or the future success of the adviser in managing its other funds. Approximately 10% of funds received 5 star award (top ten) in these categories. These category rankings only reflects two category rankings produced by Morningstar. The Adviser did not pay a fee to participate in the in Morningstar’s rating system. Morningstar ratings do not represent the entire universe of Preferred Stock or Energy limited Partnership funds offered to investors, rather this rating represents a subset of Preferred Stock and Energy Limited Partnership funds. For more information about the ranking and rating process, please contact Morningstar at 1-312-384-4000, or visit https://bit.ly/440AjUT.

A word about SCAP risk:  Investing involves risk, including possible loss of principal. An investment in the Fund may be subject to risks which include, among others, investing in equities securities, dividend paying securities, utilities, small-, mid- and large-capitalization companies, real estate investment trusts, master limited partnerships, foreign investments and emerging, debt securities, depositary receipts, market events, operational, high portfolio turnover, trading issues, active management, fund shares trading, premium/discount risk and liquidity of fund shares, which may make these investments volatile in price. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund’s returns. Small and Medium-capitalization companies, foreign investments and high yielding equity and debt securities may be subject to elevated risks. The Fund is a recently organized investment company with no operating history. Please see prospectus for discussion of risks. Diversification cannot assure a profit or protect against loss in a down market.  SCAP is distributed by Quasar Distributors, LLC.

 

A word about ICAP Risk: Investing involves risk, including possible loss of principal. An investment in the Fund may be subject to risks which include, among others, investing in equities securities, dividend paying securities, utilities, preferred stocks, leverage, short sales, small-, mid- and large-capitalization companies, real estate investment trusts, master limited partnerships, foreign investments and emerging, debt securities, depositary receipts, market events, operational, high portfolio turnover, trading issues, options, active management, fund shares trading, premium/discount risk and liquidity of fund shares, which may make these investments volatile in price. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small and Medium-capitalization companies, foreign investments, options, leverage, short sales, and high yielding equity and debt securities may be subject to elevated risks. The Fund is a recently organized investment company with no operating history. Please see prospectus for discussion of risks. ICAP fund distributor, Quasar Distributors, LLC.

 

Virtus InfraCap U.S. Preferred Stock ETF (NYSE: PFFA): 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. 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. 

 

InfraCap REIT Preferred ETF (NYSE: PFFR): 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. Real Estate Investments: The Fund may be negatively affected by factors specific to the real estate market, including interest rates, leverage, property, and management. 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. Passive Strategy/Index Risk: A passive investment strategy seeking to track the performance of the underlying index may result in the Fund holding securities regardless of market conditions or their current or projected performance. This could cause the Fund’s returns to be lower than if the Fund employed an active strategy. 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. 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. Prospectus: For additional information on risks, please see the Fund’s prospectus.

 

InfraCap MLP ETF (NYSE: AMZA): 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. MLP Interest Rates: As yield-based investments, MLPs carry interest rate risk and may underperform in rising interest rate environments. Additionally, when investors have heightened fears about the economy, the risk spread between MLPs and competing investment options can widen, which may have an adverse effect on the stock price of MLPs. Rising interest rates may increase the potential cost of MLPs financing projects or cost of operations, and may affect the demand for MLP investments, either of which may result in lower performance by or distributions from the Fund’s MLP investments. 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. 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. MLPs: Investments in Master Limited Partnerships may be adversely impacted by tax law changes, regulations, or factors affecting underlying assets. 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.

 

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 www.virtusetfs.com for performance data current to the most recent month-end and the Fund’s standard performance information. Past performance is not indicative of future results.

Indices / Performance Terminology Used: For more information regarding the underlying data, calculations, or terminology used, please reach out to us. Please CLICK HERE to see a glossary of terminology and indices used.

 

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Past performance is not indicative of future results.

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