Active Management Revives with Preferred Stock Investment Strategy

Preferred stock can provide benefits for active management in the finance world. Passive indexing has historically been successful in the equity market, with 76.26% of US large-cap active funds underperforming the S&P 500 Index over the past five years. However, preferred stock can offer advantages for investors looking for active management strategies.

In the realm of finance, preferred stock has emerged as a viable option for investors seeking active management strategies. While passive indexing has historically dominated the equity market, with 76.26% of US large-cap active funds underperforming the S&P 500 Index over the past five years [1], preferred stock offers unique advantages that can be exploited through active management.

Preferred stock represents an ownership share in a company, acting somewhat like a bond with fixed dividend payouts. Unlike common stock, preferred stockholders do not have voting rights but are prioritized in dividend payouts. This predictability and priority can be particularly appealing to investors looking for steady income.

The Virtus InfraCap U.S. Preferred Stock ETF (NYSEARCA:PFFA) exemplifies the potential of active management in the preferred stock market. Over the five-year period ending June 30, 2025, PFFA delivered an average annual NAV return of 12.93%, significantly outperforming the S&P U.S. Preferred Stock Index's 4.06% average annual return [1]. This performance underscores the value of a hands-on, research-driven approach in this underappreciated asset class.

One of the key reasons for PFFA's success is its ability to navigate the unique challenges of preferred stock. Traditional indexing methodologies, which rely on size and volume, can lead to sector concentration and over-reliance on financials, which make up nearly 72% of the S&P U.S. Preferred Stock Index. PFFA, however, actively diversifies across sectors such as real estate, mortgage REITs, industrials, and utilities, reducing sector concentration and avoiding negative yield-to-call situations [1].

Moreover, PFFA employs modest leverage, typically around 20–30%, to boost beta and income generation in environments where the risk-reward profile is attractive. This strategy helps raise the 30-day SEC yield to 9.73% as of June 30, 2025 [1]. This dynamic approach is crucial in a market where liquidity is thinner, and institutional coverage is far more limited than in traditional equity categories.

Preferred stock is often overlooked, but strategies like PFFA demonstrate that active management can still deliver value in this niche segment. While passive indexing may be effective in the broader equity market, the unique structure and challenges of preferred stock make it an ideal candidate for active management strategies.

References:
[1] https://seekingalpha.com/article/4813529-pffa-case-for-active-management-preferred-stock