Investors tired of pie-in-the-sky tech stock profits might look for more concrete returns. Infrastructure Capital Advisors' best ETFs offer industry-topping returns combined with juicy yields in real assets.
As its name suggests, the New-York-based fund manager invests in infrastructure sectors such as energy, real estate, transportation, industrials and utilities. This is what the company refers to as real assets.
InfraCap's long-term strategy seeks to capture attractive returns over full market cycles. Along the way, it might use modest leverage and covered-call writing strategies to enhance the funds' income.
With $1.1 billion in total assets, InfraCap offers four funds focused on large-cap dividend payers, preferred securities, U.S. midstream energy master limited partnerships (MLPs) and preferreds issued by real estate investment trusts (REITs). Three out of the four are actively managed.
Its Virtus InfraCap U.S. Preferred Stock was one of the best-performing ETFs of 2023. It sported a 17%-plus return in the bond ETF category in January.
InfraCap's founder and CEO, Jay Hatfield, brings extensive experience in option writing and yield-oriented investments. These are then packaged in low-cost ETFs. He calls it the "extra-light hedge fund" strategy.
Hatfield has been in the financial services industry for over 30 years. His experience spans investment banking, entrepreneurship, M&A and hedge fund management. His specialty: energy capital markets. He's also on the boards of several nonprofit organizations.
Hatfield shared with IBD the founding principles of InfraCap, its funds and strategies, as well as his outlook and fund pipeline.
IBD: On what premise was InfraCap founded?
Jay Hatfield: The firm was formed in 2012 and is based in New York City. We are a boutique investment firm whose success comes from our ability to offer innovative solutions to meet the needs of income-focused investors. We are generally long-term investors seeking to maximize investment returns over full market cycles.
To minimize risk, we prefer to invest in securities backed by long-lived assets that we believe will generate substantial streams of free cash flow. In an effort to enhance income for more risk-tolerant investors, we may use modest leverage or options strategies. We predominantly focus on managing ETFs; however, we manage hedge funds and separately managed accounts as well.
IBD: How does the company differentiate itself from other firms in the space?
Hatfield: Current income is a primary objective in most, but not all, of (our) investing activities. We pursue opportunistic sector selection largely in key infrastructure sectors. These sectors include energy, real estate, transportation, industrials and utilities.
We generally focus on companies that generate and distribute substantial streams of free cash flow. This approach is based on the belief that tangible assets that produce free cash flow have intrinsic values that are unlikely to deteriorate over time.
We often identify opportunities in entities that are not taxed at the entity level, such as master limited partnerships and real estate investment trusts.
IBD: Please describe the four ETFs and how they fared last year and this year?
Hatfield: InfraCap U.S. Preferred Stock ETF is an exchange traded fund that seeks current income by investing in U.S.-listed preferred securities, utilizing leverage and implementing an option overlay strategy. Its year-to-date return was 17.61% as of Jan. 31, 2023.
InfraCap MLP ETF is an actively managed exchange traded fund that seeks total return primarily through investments in equity securities of publicly traded master limited partnerships and limited liability companies taxed as partnerships. The year-to-date return through Jan. 31, 2023, is 32.51%.
InfraCap Equity Income ETF is an exchange traded fund incorporated in the U.S. The fund seeks to maximize income and pursue total return opportunities. The fund, under normal conditions, will invest at least 80% of its net assets in equity securities of companies that pay dividends during normal market conditions. From inception (on Dec. 29, 2021) it returned 1.17%, while the S&P 500 over the same period is down 12.26% as of Jan. 31, 2023.
InfraCap REIT Preferred ETF is an exchange traded fund that is passively managed and tracks the Indxx REIT Preferred Index. The fund seeks returns by offering a diversified instrument in preferred securities issued by REITs. Its year-to-date return is 14.6% as of Jan. 31, 2023.
IBD: Which funds saw the largest inflow in 2022 and so far in 2023?
Hatfield: The funds with the most substantial inflows were our Preferred Stock ETF and our Equity Income Fund.
PFFA has outperformed almost all preferred ETFs, including the largest ETF Index, the S&P Preferred Stock Index, from its inception. In 2023 alone, PFFA has had net inflows of 5.65 million shares and approximately $120 million.
In 2023, our newest fund, ICAP, has had net inflows of 1.45 million shares and approximately $30 million.
IBD: How do you see your ETFs navigating the current environment and how do they fit in today's markets?
Hatfield: InfraCap U.S. Preferred Stock ETF has a mix of credit risk and interest-rate risk. In 2022, we saw a large drawdown to fixed-income investments due to rising interest rates. PFFA has shorter-duration securities as compared to the S&P Preferred Stock Index due to holding higher-yielding securities. We believe preferred securities will continue to do well in 2023.
For InfraCap MLP ETF, midstream energy infrastructure should continue to benefit from a period of underinvestment, elevated commodity prices and increasingly important U.S. energy supply in the context of the Ukraine-Russia war. After a period of overbuilding in 2019, midstream is poised to benefit from additional volumes with minimal capital expenditure. Additionally, midstream is a relative beneficiary of inflation as many contracts contain inflation pass-through provisions while operating costs are primarily fixed.
We believe ICAP will track more closely to value factors (high free cash flow, high dividend yield and lower growth). We may continue to overweight to energy as compared to major indices, allocate to mandatory preferred securities to enhance yield, and opportunistically write call options on approximately 35% of the notional portfolio. We believe this strategy will perform best in an incrementally rising market.
InfraCap REIT Preferred ETF is passively managed and tracks the Indxx REIT Preferred Stock Index. Similar to other fixed-income funds, PFFR benefits from declining interest rates. The general performance of office real estate, an evolving factor, will also play a role in PFFR's performance.
IBD: What are the tax advantages of some of your funds?
Hatfield: Many of our funds and strategies are constructed and managed with a focus on tax considerations. For example, an ETF that has a regulated investment company (RIC) structure offers potential tax and cost efficiencies because, within the structure, securities are generally not sold to raise cash to meet redemptions. Instead, an "in-kind" mechanism allows the ETF to meet redemptions without selling securities and realizing capital gains.
At the portfolio holdings level, we may invest in MLPs, REITs and other asset intensive sectors that offer investors various tax benefits through qualified distributions (i.e., 199A and ROC from MLPs or REITs). We believe these considerations can benefit income investors.
IBD: Do you have other funds in the pipeline?
Hatfield: We are considering launching an actively managed equity REIT strategy with leverage and option overlay in 2023. We think there are opportunities across REIT sectors as a result of the Covid-19 pandemic, inflation and higher interest rates.
IBD: What is your economic outlook?
Hatfield: The Infrastructure Capital Real Time CPI Index (CPI-R) has been negative over the last four months declining at an average annualized rate of over 4%, signaling that inflation has peaked and will likely decline rapidly over the next six to 12 months.
As for economic growth, we do not expect a recession in the U.S. in 2023 due to a very resilient housing sector with an ongoing shortage of housing and tailwinds from the enormous 70% energy cost advantage relative to the rest of the world. We expect 2022 economic growth to slow dramatically into the 0%-to-2% range due to erratic and very hawkish monetary policy.
IBD: What message do you have for investors today?
Hatfield: With tech sector performance outpacing value over the past decade, it is easy to forget that the Dow Jones Industrial Average has displayed better risk-adjusted returns than the Nasdaq composite over the long term. We believe a disciplined investing approach should have a focus on durable free cash flow, modest growth and a dividend which boosts confidence in those earnings.
