Despite immense volatility last year, most bonds and dividend stocks have never been as low-yielding as they are today. This is particularly true after accounting for the negative impact of rising inflation which has pushed
PFFA: Leverage, Preferred Stocks, And Rising Rates Do Not Mix
Summary
- Many income investors are looking toward higher-risk funds to boost returns in the low-rate environment, causing potential risk miscalculations.
- PFFA is an increasingly popular actively managed levered preferred equity ETF with a higher expense ratio of ~1.5% and a dividend yield of ~8% today.
- Investors should not mistake PFFA for a low-risk fund as it has a high beta of ~1.5 and is about twice as volatile as a non-levered preferred equity fund.
- A closer look at PFFA's holdings shows that it carries very high exposure to mortgage REITs which may carry high bankruptcy risk as the Federal Reserve ends Q.E.
- If PFFA is an ideal "buy low sell high" investment, now may be a good time to sell since its upside potential appears limited as rates are unlikely to decline further.
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.
Analyst’s Disclosure:I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in PFFA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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