Preferred Stocks Poised to Benefit From Fed Rate Cuts, Says Virtus Money Manager

Jay Hatfield, founder and CEO of Infrastructure Capital Advisors, believes that preferred stocks are well-positioned to benefit from the Federal Reserve’s recent shift towards an easing monetary policy. He argues that preferred stocks, which occupy a middle ground between bonds and common stocks in terms of risk and return, tend to perform well during periods of interest rate cuts and strong stock market performance.

Hatfield, who manages the Virtus InfraCap U.S. Preferred Stock ETF (PFFA), pointed out that “high yield bonds and preferred stocks tend to outperform other fixed-income categories when the stock market is strong and interest rates are declining, as they are now.”

His ETF, which has generated a 10% return in 2024 and nearly 23% over the past year, focuses on selecting preferred stocks that are undervalued relative to their risk and yield. The fund’s top holdings, as of September 30th, include Regions Financial, SLM Corporation, and Energy Transfer LP, all of which have experienced substantial gains this year.

Hatfield’s investment strategy prioritizes companies in “asset-intensive” businesses, which often issue preferred stocks. These companies typically have significant tangible assets, providing a degree of security for preferred stockholders.

While the Virtus InfraCap U.S. Preferred Stock ETF has faced challenges since its inception in 2018, Hatfield remains optimistic about the outlook for preferred stocks in the current market environment. The combination of a strong stock market, declining interest rates, and the Fed’s accommodative monetary policy stance creates a favorable backdrop for these hybrid securities.

Key Takeaways:

• Preferred stocks are viewed as an attractive investment opportunity in the current market environment.
• They tend to benefit from declining interest rates and strong stock market performance.
• The Virtus InfraCap U.S. Preferred Stock ETF, managed by Jay Hatfield, focuses on undervalued preferred stocks in asset-intensive businesses.
• Despite past challenges, the outlook for preferred stocks is positive, given the Fed’s easing monetary policy.

As the Federal Reserve continues its rate-cutting cycle, investors seeking to diversify their portfolios and capitalize on potential opportunities within the fixed-income market may consider allocating a portion of their assets to preferred stocks, particularly those that meet Hatfield’s criteria for undervaluation and strong fundamentals.