Writer’s observe: This text was launched to CEF/ETF Revenue Laboratory members on June 18th.
The InfraCap REIT Most popular ETF (NYSEARCA:PFFR) provides traders publicity to REIT most popular, and has a robust, secure 8.1% dividend yield. PFFR focuses on a selected funding area of interest, offering much less diversification than most most popular or bond index ETFs. In my view, the fund’s robust yield makes it a purchase, however the fund’s area of interest holdings imply positions needs to be saved small.
PFFR – Overview and Evaluation
PFFR is a most popular shares index ETF. The biggest ETF for these securities is the iShares Most popular and Revenue Securities ETF (PFF), which shares many similarities and variations with PFFR. I will be evaluating these two funds all through the article, as doing so will assist present PFFR’s most essential traits, positives, and advantages.
Index and Holdings
PFFR is a REIT most popular index ETF, monitoring the Indxx REIT Most popular Inventory Index. It’s a comparatively easy index, investing in all U.S. REIT most popular shares assembly a primary set of inclusion standards, together with having a yield larger than 3.0%. At present rates of interest, stated standards doesn’t materially restrict the fund, though the influence was a lot larger in prior years. It’s a market-cap weighted index, with sure guidelines to make sure a modicum of diversification, which is especially essential contemplating the index’s area of interest holdings.
PFFR solely invests in REIT most popular, whereas most different most popular ETFs, together with PFF, spend money on most popular from most industries. The result’s a considerably concentrated fund, specializing in an extremely slim trade area of interest. It does have fairly a little bit of diversification inside stated area of interest, with investments in 105 completely different securities from 50 completely different issuers. PFFR’s largest holdings are as follows.
As a comparability, PFF invests in over 400 securities from a whole lot of issuers, and with publicity to a few completely different industries.
PFFR’s larger focus will increase danger, volatility, and the potential for outsized losses and underperformance on account of losses in anybody particular issuer. For instance, and as per fund knowledge, PFFR has seen losses of round 4.0% on account of weak point in Vornado Realty Belief (VNO), an workplace REIT. Very sizable losses from a person issuer, and VNO continues to be alive and worthwhile.
Losses in different workplace REITs, together with Diversified Healthcare Belief (DHC) and Hudson Pacific Properties (HPP), quantity to a different 4.0%. These losses have been virtually solely liable for the fund’s underperformance since inception.
PFFR’s concentrated portfolio is a major destructive for the fund and its shareholders. As such, and in my view, traders ought to restrict place sizes within the fund, in order to keep away from the opportunity of vital underperformance on account of idiosyncratic components. I might not go above 5%.
PFFR provides traders an 8.1% dividend yield. It’s a robust yield on an absolute foundation, reasonably increased than PFF’s 6.3% yield, and better than that of most kinds of bonds and equities.
PFFR’s dividends are remarkably secure too, with the fund paying the very same $0.12 month-to-month dividend since early 2019. Dividends fluctuated in prior years, particularly when the fund modified from a quarterly dividend to a month-to-month one in early 2019, however these weren’t dividend cuts per se.
PFFR’s dividend stability is a vital profit for shareholders, particularly contemplating the fund’s robust yield.
On a extra destructive observe, the fund’s dividends are wanting a bit unsafe, a bit dangerous, proper now, for 2 causes.
First, the fund’s underlying holdings generated round 0.40% much less in revenue than the fund distributed to shareholders in Could. As per my very own calculations utilizing fund knowledge, the same hole stays as of June.
Because the fund’s dividends should not absolutely lined, these may very simply be reduce within the coming months.
Second danger for the fund’s dividends is ongoing workplace REIT weak point. Demand for workplaces is sort of weak, as increasingly employees are selecting to earn a living from home over commuting to an workplace. Greater rates of interest additionally destructive influence closely indebted REITs though, from what I’ve seen, the riskier, extra leveraged REITs have hedged their rate of interest publicity. In any case, continued sector weak point may end in dividend suspensions. From taking a look at PFFR’s main holdings, plainly workplace REITs account for round 10% of the worth of the fund, so the fund may see sizable reductions in revenue and dividends if this had been to happen.
PFF’s dividends appear a lot safer than these of PFFR, in these regards.
On a extra constructive observe, the fund will virtually actually profit from increased rates of interest from earlier Fed hikes. It might take years for hikes to go by to all related securities, together with most popular, and months for ETFs to distribute elevated revenue to shareholders, but it surely ought to occur. For what it is price, PFF has seen robust dividend development since hikes began in early 2022, as have most different broad-based bond index ETFs.
PFFR’s general efficiency track-record is below-average, at greatest, with the fund underperforming relative to PFF, and most broad-based bond index ETFs, since inception.
PFFR’s underperformance was principally on account of weak point within the workplace REIT sector, as talked about beforehand.
From what I’ve seen, widening credit score spreads additionally performed a task, as PFFR tended to underperform relative to PFF when credit score spreads narrowed, outperformed when these widened. Particularly, PFFR outperformed from inception to very early 2020, when credit score spreads had been low and secure / narrowing. The fund considerably underperformed when spreads widened because the coronavirus pandemic was in full swing, from February 2020 to late 2020. PFFR matched the efficiency of PFF in 2021, when spreads barely narrowed, after which considerably underperformed from 2022 onwards, when these widened.
Credit score spreads, influenced by underlying financial circumstances and investor sentiment, appear to play an essential function in PFFR’s absolute and relative efficiency.
PFFR’s robust 8.1% dividend yield makes the fund a purchase. Because the fund is sort of concentrated, place sizes needs to be saved small, in my view not less than.