Infrastructure Capital Launches Active ETF on US Preferred Shares

In a strategic move that sidesteps London's lively debt fund market, New York's Infrastructure Capital has introduced a pioneering, actively managed exchange-traded fund (ETF) based in Dublin. By launching this ETF, the firm enters the arena of U.S. preferred shares, marking a first in Europe.

The Infrastructure Capital Preferred Income Ucits ETF, identified by the ticker PFFI, has been listed on several exchanges including the London Stock Exchange, Germany’s Xetra, and Italy’s Borsa Italiana. HANetf facilitated this launch, aiming to capture a segment of investors seeking income through an innovative fund structure.

PFFI is designed to generate substantial monthly income by investing in a diverse array of U.S. preferred securities, which are positioned between unsecured bonds and ordinary shares. These securities generally yield higher returns than investment-grade corporate bonds, with a priority on coupon payments over dividends.

Choosing an ETF Format

The decision to employ an open-ended ETF format might spark debate due to the relatively illiquid nature of U.S. preferred shares, which could have been better suited to a closed-end fund model, providing more protection against rapid investor withdrawals.

Despite the vibrant performance of London-listed investment companies, Infrastructure Capital opted for this innovative ETF route. Data from the Association of Investment Companies indicates that in contrast to an average 13% discount in the broader sector, high-yield bond funds enjoy a 2.8% premium on net asset value. This trend was highlighted by recent share issues from CVC Income & Growth (CVCG) and Twenty Four Income Fund (TFIF), as reported in one article and another.

Potentially influenced by the challenges faced by EJF Investments (EJFI), which offers an attractive yield but trades at a significant discount, Infrastructure Capital might have found the task of raising £100m daunting. Launching PFFI required under $1m, showcasing a more accessible pathway.

Understanding Preferred Securities

Jay Hatfield, CEO of Infrastructure Capital, describes the $192bn U.S. preferred share market as smaller and less volatile than the $1tn high-yield bond market, offering unique value opportunities. Hatfield, along with co-manager Andrew Meleney, aims to identify companies capable of high profitability and capital access.

The fund's portfolio includes 64 holdings with a 0.8% expense ratio, prominently featuring a 3.6% allocation to a 9.25% perpetual bond by Energy Transfer. Hatfield's extensive experience in the energy sector supports the fund's strategic positioning.

Reevaluating Risk and Inflation

In a bid to redefine risk assessment, the fund will utilize proprietary credit ratings, diverging from traditional agencies like Moody’s and Fitch, which Hatfield claims underestimate preferred stock risks.

Addressing inflation concerns, Hatfield argues against prevailing forecasts, stating, “Anticipation of Trump policies have caused the dollar to strengthen by 10% which is highly deflationary." He remains optimistic about bonds and preferred shares, considering inflation fears "completely irrational."

As PFFI joins the ranks of active ETFs in Europe, it symbolizes a broader trend in the investment landscape, shifting towards actively managed funds in traditionally passive markets.