Motley Fool Money (Nov 2, 2025)

Episode: "Why Income Investors Should Look Beyond Index Funds"

Host: Matt Greer (Producer)
Guests: Jay Hatfield (CEO, Infrastructure Capital Advisors), Matt Arger Singer (Motley Fool Analyst), Anthony Chavon (Motley Fool Analyst)

Episode Overview

This episode delves into the unique advantages of preferred stocks for income-oriented investors, exploring why relying solely on index funds may not be optimal—especially in the fixed income and preferred equity sector. Guest Jay Hatfield, with three decades of investment experience, outlines the practical benefits of preferred equities, discusses active management strategies, and explores the broader economic impact of increased capital expenditures by tech giants and the state of the housing market.

Key Discussion Points & Insights

1. Introduction to Preferred Equities

Timestamps: 00:05 - 03:39

• Jay Hatfield explains what preferred stocks are: securities issued by high-quality public companies that are senior to common stock, meaning they get paid before common shareholders during distributions and in bankruptcy.
• Main advantages:
  • Lower risk than common stock
  • Yields of around 7%-9% (e.g., his fund yields ~9%), which can generate strong total returns
  • Lower volatility (around 40% as volatile as the market)
  • Default rates are very low (~0.6% per year), allowing investors to "retain most of that 8%" yield
• Preferred stocks are exchange-listed, making them relatively easy to trade, and investors don't usually face high commissions.

Memorable Quote:

"They have way less risk than the common in the same company, but yet they have very good yields, which usually results in very good total return."
— Jay Hatfield [00:05]

2. Comparing Preferred Equity to Other Income-Producing Assets

Timestamps: 03:39 - 05:02

• Comparison with other income assets:
  • Similar to high-yield bonds in terms of returns/yields but have lower default rates
  • Outperform traditional investment-grade bonds (like the Vanguard BND fund), especially post-tightening cycles
  • Best suited for markets with stable/rising equities and steady or declining interest rates
• Current market position:
  • Now is an ideal environment for higher-risk bonds, with the Fed shifting from tightening to loosening monetary policy.

Notable Explanation:

"Both high yield bonds and ... preferreds do well when the stock market's stable to rising and rates are stable to dropping ... So you can get better total returns when we're coming out of a tightening cycle."
— Jay Hatfield [03:59]

3. Active vs. Passive Strategies in Preferred Stock Funds

Timestamps: 05:34 - 08:49

• PFFA's strategy vs. passive index funds (e.g., PFF from iShares):
  • Passive indexing works with equities but is suboptimal for preferred stocks and fixed income because:
    • Index funds are typically market-cap weighted and end up "buying high and selling low" due to call features (securities are often called at par value).
    • Index funds can't participate in new issues and are forced to buy at higher prices when the market rebalances or fund flows increase.
    • Active management allows for better call, interest rate, and credit risk management.
  • PFFA has substantially outperformed passive competitors since inception.

Memorable Quote:

"With fixed income, you're doing the opposite of what you should do ... so they buy high and sell low ... but it's a terrible idea."
— Jay Hatfield [06:12]

• Active managers can also trade new issues and sell securities at overrated prices to index fund buyers, capturing additional gains.

4. Practical Considerations for Individual Investors

Timestamps: 08:49 - 11:02

• DIY pitfalls: Building a diversified preferred portfolio is labor-intensive, requires tracking call prices and managing quality/interest rate risk.
• Scale matters: Much easier for institutional managers to optimize trading, participate in new deals, and manage large, diversified positions.
• Personal account strategy: Even Hatfield invests in PFFA within his own IRA, citing simplicity and scale, despite being an expert in the field.

Notable Commentary:

"It's not worth it for me to go in and manage each security ... For us, we have hundreds of thousands of shares and we have institutional trading techniques ... So there's economies of scale for having an ETF managed by people like us."
— Jay Hatfield [08:49]

5. Economic Outlook: Capex Boom & Real Assets

Timestamps: 11:02 - 13:23

• On the capital expenditures (capex) boom:
  • The shift of tech giants (the "Mag 7") from digital-only to heavy investment in physical infrastructure (data centers, power, semiconductors, real estate) is significant for the real economy.
  • Capex in intellectual property and equipment remains strong—offsetting weakness in traditional real estate and homebuilding.

Memorable Moment:

"Thank God [for big tech capex spending], because … construction and housing are in recession ... but intellectual property ... is actually pretty strong."
— Jay Hatfield [11:38]

• Unique cycle: Unlike the early 2000s, where the tech bust had minimal real-economy impact, today’s investment by tech is directly affecting old-economy sectors.

6. The Hatfield Rule and Predicting Recessions

Timestamps: 14:36 - 17:42

• The "Hatfield Rule": Inspired by the "Sahm Rule" (employment-based), Hatfield’s rule points out that almost all post-WWII US recessions were caused by declines in housing investment.
  • Recession risk increases when housing starts fall below 1.1 million units annually.
  • There are really just two variables to watch: the Fed (money supply policy) and housing/construction data.
• Macro forecasting: By monitoring these, investors can predict recessions and inflation events with remarkable accuracy.

Notable Quote:

"All recessions don't come from the consumer ... 12 out of 13 post World War II recessions were caused by housing declines ... If you Buy into our methodology ... you can predict the inflation and economy nearly perfectly."
— Jay Hatfield [14:53]

• Advice to listeners:
  • Watch Fed policy and money supply
  • Track housing market activity for economic signals

Notable Quotes & Timestamps

• "They have way less risk than the common in the same company, but yet they have very good yields, which usually results in very good total return."
  — Jay Hatfield [00:05]

• "Both high yield bonds and ... preferreds do well when the stock market's stable to rising and rates are stable to dropping ... So you can get better total returns when we're coming out of a tightening cycle."
  — Jay Hatfield [03:59]

• "With fixed income, you're doing the opposite of what you should do ... so they buy high and sell low ... but it's a terrible idea."
  — Jay Hatfield [06:12]

• "It's not worth it for me to go in and manage each security ... For us, we have hundreds of thousands of shares and we have institutional trading techniques ... So there's economies of scale for having an ETF managed by people like us."
  — Jay Hatfield [08:49]

• "Thank God [for big tech capex spending], because … construction and housing are in recession ... but intellectual property ... is actually pretty strong."
  — Jay Hatfield [11:38]

• "All recessions don't come from the consumer ... 12 out of 13 post World War II recessions were caused by housing declines ... If you Buy into our methodology ... you can predict the inflation and economy nearly perfectly."
  — Jay Hatfield [14:53]

Conclusion

This episode provides a nuanced look at preferred stocks as a compelling income strategy—especially in a post-tightening monetary landscape—making the case for active management over index funds in this asset class. Hatfield’s insights into macro triggers (Fed action, housing data) and the economy-wide effects of tech capex offer valuable perspective for both novice and seasoned investors seeking income and portfolio resilience.

For further learning:

• Infrastructure Capital Advisors’ resources and slides on market data
• Monitoring housing starts and money supply for macroeconomic forecasting
• Consider PFFA and similar actively managed preferred ETFs for efficient yield with relative safety

Note: This summary omits advertisements and non-content sections. All investment opinions are for informational purposes and should not be considered formal financial advice.