Trap!? PFFA's 9.6 Percent Preferred Yield Hides Up to 33 Percent Borrowed Leverage Most Income Investors Never See

PFFA shows a distribution yield of 9.67% versus 5.6% for an unleveraged preferred-income fund. The higher yield is produced by leverage, with the fund able to borrow up to 33.3% of total assets and typically holding 15% to 25% of net assets in borrowings. The fund buys preferred shares and finances additional purchases with short-term borrowing tied to SOFR plus a spread. The strategy relies on preferred yields exceeding financing costs. When credit spreads widen, both the preferred holdings and the borrowing economics move against the fund. Higher leverage also increases total costs, including financing and expenses, leading to a near 2.11% expense ratio versus about 0.45% for unleveraged peers.

"The headline number on Virtus InfraCap U.S. Preferred Stock ETF ( NYSEARCA:PFFA) is a distribution yield at 9.67%, which looks generous against the unleveraged iShares Preferred and Income Securities ETF ( NASDAQ:PFF) at 5.6%. The machinery that produces PFFA's extra yield is borrowed money. The fund can leverage up to 33.3% of total assets under the Investment Company Act, and it typically carries 15% to 25% of net assets in borrowings to buy more preferreds than your capital alone would fund. That is the entire pitch, and most retirees who buy PFFA for the monthly check are yet to fully understand what this implicates."

"Preferred shares are hybrid securities that pay a fixed coupon and sit between bonds and common stock in the capital structure. Most issuers are banks and insurers, which means the sector trades like high-grade credit in good weather and like equity in bad. Infrastructure Capital Advisors, PFFA's manager, buys a basket of these, then borrows at a short-term rate tied to SOFR plus a spread and uses the proceeds to buy still more of them. The carry works as long as the yield on the preferreds exceeds the financing cost. When credit spreads widen, both sides of that trade move against the fund at once."

"That is why PFFA's expense ratio sits near 2.11% with financing costs included, compared with about 0.45% for PFF and a similar figure for Invesco Preferred ETF ( NYSEARCA:PGX). You are paying more to borrow more. It costs money to borrow, and active ETFs also have to pay their teams. Whether the math has worked Over the trailing year, PFFA returned 15% on price against PFF's 10%, and adding distributions widens the gap."

"Stretch the window to five years and PFFA's price return of 39% against PFF's 8.6% still flatters PFFA, though the 2022 rate-hiking cycle clipped that lead and the borrowing bill grew with every Fed move. The "

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