In the second quarter of 2025, the investment landscape for preferred stocks presented a complex picture. The S&P U.S. Preferred Stock Index, serving as the benchmark for this asset class, posted a modest gain of 2.31%. This performance, however, lagged significantly behind the broader S&P 500\u00ae Index, which surged by 10.94%, largely propelled by a robust recovery in common stocks following what has been termed \"Liberation Day.\" The disparity highlights a divergence in market sentiment and underlying drivers between preferred and common equities during this period. We anticipate that the initially proposed tariffs are improbable, suggesting a more stable trade environment going forward.
Amidst this market backdrop, the Virtus InfraCap U.S. Preferred Stock ETF navigated its own course. For the quarter, the ETF's net asset value (NAV) registered a slight decline of 0.10%. A notable aspect of the Fund's strategy and investor appeal was its consistent distribution of monthly dividends, with shareholders receiving $0.17 per share each month throughout the quarter. The primary factor influencing the Fund's relative underperformance was its strategic underweighting in mandatory convertible preferred stocks. These particular instruments, by their very nature, tend to exhibit characteristics more akin to common equity than traditional fixed income, meaning their performance is more sensitive to broader equity market movements rather than solely interest rate fluctuations or credit spreads.
The investment in preferred stocks, particularly through an ETF like Virtus InfraCap, offers a unique blend of income generation and potential capital appreciation, albeit with its own set of market sensitivities. The second quarter of 2025 underscored the importance of asset allocation and understanding the nuances of different financial instruments. While common stocks rode a wave of recovery, preferred stocks, especially those influenced by convertibility features, demonstrated a more restrained performance. This period serves as a valuable reminder for investors to carefully evaluate the composition of their portfolios and the specific behaviors of their chosen investment vehicles in varying market conditions. The steadfast dividend payouts from the Fund, even during a period of NAV decline, highlight the income-generating potential that preferred stocks can offer to investors seeking regular distributions.