How does a small new entrant make a name for itself in the ever-expanding marketplace for exchange-traded funds that is increasingly dominated by the largest providers?
Jay Hatfield, co-founder and president of Infrastructure Capital Advisors LLC, otherwise known as InfraCap, has hitched his company’s efforts to a simple message—namely, yield.
His New York City-based firm, which manages a series of hedge funds, this month launched the InfraCap REIT Preferred ETF (PFFR). In October 2014 it rolled out the InfraCap MLP ETF (AMZA), which was billed as the ETF industry’s first actively managed energy MLP-focused fund.
Both funds target what Hatfield sees as an underserved niche. “The key to success, in our view, is to focus on strong yields and cash flow,” he says. “Many investors don’t have that exposure. We’re focused on asset intensive industries, which tend to have the most stable payouts over time.”
With both ETFs, portfolio selection is based on stock selection from an underlying index. Infracap then deploys a proprietary set of criteria that focuses on the most impressive yields, on a risk-adjusted basis.
“We’re mostly focused on strong yields and not capital appreciation,” says Hatfield.
His view of the preferred stock space is instructive. These stocks currently sport an average 5.7 percent yield, the highest payouts among the various fixed income and credit-like equity securities. That’s much more than 10-Year Treasuries, and even better than high-yield bonds, which currently yield an average of 5.2 percent.
The Indxx REIT Preferred Stock Index, which underpins the PFFR fund, has an even more impressive 6.2 percent yield. The current yield on the InfraCap REIT Preferred ETF, which cherry picks the most appealing constituents of the index, is an even more robust 6.8 percent.
But there’s a catch to preferred stocks, and it’s a big one. Many of them are trading well above their call price, and now have negative yield-to-call premiums. “The call protection feature is the Achilles heel of preferreds,” Hatfield says. “The highest yielding ones are most likely to be called.”
And when preferred stocks are being called at a rapid clip, the actual yields in this asset class can drop sharply towards the four percent mark.