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

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.

You should understand the return engine before investing

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. In a benign credit environment, leverage does what it is supposed to do. 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 cleaner stress test was March 2020. The PFFA ETF absolutely cratered, and it lost over 52% of its holdings within weeks, whereas PFF was doing better than the market and only lost 17% by March 23.

PFFA’s level of value destruction was well beyond what the leverage ratio alone would predict, because forced deleveraging at the bottom locks in losses. Management also cut the monthly distribution from $0.19 to $0.15, a 21% reduction declared March 9, 2020. The stable monthly check became unstable in the exact week retirees needed it.

All that said, if the 5-year higher return impresses you, I’d think again.

PFF is an ETF that survived 2008 despite taking a 65% hit and recovered from a 17% 2020 hit much quicker. Since PFFA went down over 50% in 2020, you should think about what a 2008-esque recession would do to it before you plan to buy and hold.

Tradeoffs you should price in

Three constraints matter for anyone sizing a position.

1. Distribution durability is path-dependent. The payout has rebuilt to $0.1725 monthly through steady 1.5% annual hikes since 2022, but another credit shock can trigger another cut, and the prior cut took years to recover.
2. Sector concentration in banks. Preferreds skew heavily toward bank and insurance issuers whose securities are subordinated to senior debt. This is why the 2023 regional bank episode hit the category disproportionately.
3. Tax drag in taxable accounts. A large portion of PFFA’s distributions is taxed at ordinary-income rates, so the headline yield shrinks meaningfully for an investor in the 24% or 32% bracket.

Who PFFA actually fits

PFFA earns a place as a 3% to 5% income sleeve inside a tax-advantaged account for an investor who has consciously chosen amplified yield and accepts that drawdowns will look like equities rather than investment-grade bonds.

With shares around $21 and roughly $2.3 billion in assets, liquidity is adequate but the fund is small enough that a wave of redemptions during stress would compound the leverage problem. For anyone treating preferreds as a bond substitute or holding them in a taxable account at a top bracket, PFF or PGX deliver the same sector exposure without the borrowed crowbar underneath. The yield differential is real. So is the bill that comes due when credit turns.