This is an actively managed ETF that does not track a specific index and instead selects U.S. preferred stocks directly. It combines quantitative and qualitative evaluation with relative value analysis to determine holdings and weightings, and it expands portfolio exposure through borrowing.

It suits income-seeking investors who need a high distribution yield and can tolerate the leverage risk and the volatility that is characteristic of preferred stocks.

Launched in 2018 by Virtus / InfraCap, it is an ETF with an active (actively managed) investment approach.

The management team selects preferred stocks directly through quantitative and qualitative evaluation, and expands the size of the portfolio through bank borrowing. It also runs an options strategy alongside, a high-income structure that supplements the sources of its distributions.

• A structure that raises the distribution yield relative to passive preferred stock ETFs by using borrowing
• Integrated quantitative and qualitative evaluation directly screens the financial soundness of issuers

Assets under management (AUM) stand at $2.3B, and the Expense Ratio is 2.11% per year.

The expense ratio is high compared with the category average. This reflects the combination of active management fees and borrowing interest costs, so it is worth examining whether it offsets the distribution yield.

Preferred stocks act as a bond substitute and respond sensitively to the interest rate environment. They tend to be relatively weak during rate-hike phases and tend to benefit when expectations of a shift toward rate cuts rise. Because of the borrowing structure, interest rate changes also directly affect costs.

Fund inflows stand out when demand for high-dividend assets is strong, while credit spread widening or instability in the financial sector can put selling pressure on preferred stocks across the board. The leverage structure can amplify declines when markets fall.

A high monthly distribution rate and active selection are its strengths, but leverage and a high expense ratio are the key risks.

PREF, shown in the table, is a preferred-stock-focused active ETF and a similar product with a somewhat lower expense level. DBMF is a multi-asset strategy and differs in character, AMZA focuses on master limited partnership (MLP) energy infrastructure, and CEFS is a structure that holds closed-end funds. As direct substitutes, the passive preferred stock ETFs PFF and PFFD, as well as the actively managed FPE and PGF, can also be compared. PFF and PFFD track a preferred stock index without borrowing, so they have lower fees and no leverage risk, and they are alternatives if you prefer stability without leverage.

PFFA is an actively managed high-dividend preferred stock ETF that uses borrowing. Behind the high monthly distribution rate lie compounded risks of leverage, cost burden and interest rate sensitivity, so it is important to review the items below before investing.

Because of the leverage structure, declines in a falling market can be larger than those of non-leveraged preferred stock ETFs. During rate-hike phases, there is a risk that falling asset values and rising borrowing costs occur at the same time, and the credit risk of preferred stock issuers should also be considered.

It can be an option for investors who need monthly dividends and a high distribution rate, but it should be approached only after fully understanding the three risks of leverage, high fees and interest rate sensitivity. If you want to invest in preferred stocks without leverage, PFF or PFFD offers similar exposure at a lower cost.