Why Income Investors Should Look Beyond Index Funds

Summary

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)

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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.

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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

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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]

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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.

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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

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

Transcript

[Jay Hatfield]

They're high quality companies that are public that issue securities that are senior to common, so they get paid first. So 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.

[Matt Greer]

That was Infrastructure Capital Advisors CEO Jay Hatfield talking about the advantages of preferred stocks. Stocks I'm Motley fool producer Matt Grier. Now Motley fool analyst Matt Arger Singer and Anthony Chavon recently talked with Hatfield about preferred stocks and about why income investors should look beyond index funds.

[Jay Hatfield]

Fools.

[Matt Arger Singer]

We are so delighted to have the opportunity to speak to Jay Hatfield, the CEO and founder of Infrastructure Capital Advisors. He heads up the firm's research, strategy and trading and manages several of the firm's funds, including the Virtus InfraCap US Preferred Stock ETF. The ticker is PFF, which is a recent recommendation of our ultimate income service Here at the Motley Fool, Jay has three decades of experience in the securities and investment industries, including as a portfolio manager at SAC Capital. He also has extensive research and experience in investment banking and played a key role in the formation of NGL Energy Partners, a publicly traded master limited partnership. Jay, thanks for giving the Motley fool some of your time today.

[Jay Hatfield]

Thanks, Matt. It's great to be on.

[Matt Arger Singer]

All right. Well, before we get to know more about you and Infrastructure Capital Advisors, I was wondering if you could talk a little bit about preferred equities in general, because it's not an asset class that I think the vast majority of our Motley fool members or readers have experience with. What are in your mind, some of the big advantages of investing in preferred stocks and why is it an area of the market that investors should probably pay more attention to?

[Jay Hatfield]

Well, there's really two critical advantages of preferred stocks. The first is that they're high quality companies that are public, that issue securities that are senior to common, so they get paid first. So they have way less risk than the common of the same company, but yet they have very good yields, which usually results in very good total return. So a lot of the yields are 79, like our fund yields around 9 right now. And so you get returns, potential returns that are competitive with the market, probably below the market market usually does. 10, 11. If you're all in tech stocks, you might do 15 or 20, but with way less risks or about 40% as volatile as the market. The default rate has been extremely low, about 0.6% a year. So you really retain most of that 8%. So it's a good way to have kind of a Baseload. Even if you have some speculative stocks where you know you get paid, you get paid every month and then you can recycle that money either into other stocks or buy more. So really a great asset class of public companies. And then we only invest in preferreds that are listed so they're easier for us to trade, there's less friction and we usually do it in a way where we don't have to pay substantial commissions. So a really efficient asset class that I would recommend you can do it yourself. So a lot of work it's hard to build a diversified portfolio should be diversified with fixed income, not necessarily with stocks but with fixed income since they have limited upside, there's no real advantage to concentration.

[Anthony Chavon]

So Jay, kind of on that point, investors have many choices to generate income today. You can look at dividend paying stocks, investment grade bonds, high yield bonds, real estate, plenty of other income producing securities out there. So what are some of the benefits of preferred equity compared to some of those other income producing alternatives?

[Jay Hatfield]

Well, the way to think about it is they're very similar to high yield bonds. They have lower default rates but similar yields. So probably in the long run they'll have better returns and they do well. So both high yield bonds and we have a high Yield Bond Fund, BNDs do well when the stock market's stable to rising and rates are stable to dropping. And so that's we're in an ideal market for higher risk bonds for investment grade bonds. So there's a competing fund, bnd that's run by Vanguard, that is investment grade but they're only yielding 4 and they only benefit when the bond when yields drop. And we think yields are going to drop a little but not a lot. So you can get better total returns when we're coming out of a tightening cycle because the Fed causes all recessions. Fed's loosening now and so when the Fed's loosening you want to have higher risk fixed income, not lower risk fixed income.

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[Matt Arger Singer]

Then the Virtus Infra Cap US Preferred Stock ETF PFFA is the ticker. As I mentioned, we recently recommended the fund in one of our portfolio services. Us here at the full what is the primary strategy of the PFFA fund? And I'd love to know how it differs from other preferred equity ETFs that exist in the market. One example of course being PFF, which is the iShare Preferred and Income securities ETF. It has a very similar ticker to PFFA. But I will point out that your fund, PFFA has handily outperformed that fund. In fact more than doubled its return since inception in 2018. How you've been able to do that and what are the key differences?

[Jay Hatfield]

Well, I'm sure your listeners and viewers have heard from companies like Vanguard that it can be better to be passive when you're buying mutual funds or ETFs, but that only holds true for equities and not fixed income. And the reason for that is with equities they're cap weighted. And that can be great because when you're cap weighted you tend to get the best stocks and you get momentum, which is wonderful. But with fixed income you're doing the opposite of what you should do because these securities are callable at par. So if they're up, then you want to actually sell them, not buy them. And all These large index funds, 70% of the market, PFF is the biggest, are in fact index funds. So they buy high and sell low. And like I said, that actually can work in the stock market because you get more Nvidia and get more of the high flying stocks, but it's a terrible idea. So we manage, we're actively managing. Call risk was really what I was talking about. So they're doing the opposite. But when security goes above par, we start selling it. Usually the index funds, because they don't have any smart beta rules and when they get inflows, their market makers just go and buy the securities and we can sell it to them. Or if they're rebalancing, which they do every month, we also manage interest rate risk so we have less interest rate risk. When the Fed was tightening because we correctly forecasted that inflation was going to not just rise, but skyrocket. And so we anticipated that. And of course we're constantly managing credit risk. You don't want to be in weak preferred stock credits because they don't do well if there is a bankruptcy. So you want to sell them and then finally we can do new issue. So participate in new issues. The index funds cannot. They get listed and typically all the index funds then bid up those securities and we start selling to them because we stole. They're good companies and they're liquid. So we start selling to them at higher prices. So we're able to get significant gains without taking a lot significant risk, whereas the index funds cannot do that.

[Matt Arger Singer]

That's interesting. I can imagine a lot of investors, retail investors in particular, don't know that. But you know, it's. What you're saying is it's actually in the bond and fixed income world and in the preferred equity world. It sounds like active management is what you want to be following.

[Jay Hatfield]

It's really critical. Like I said, you can go look there's listings and barons and other sources, maybe on Motley fool for preferred stocks. But you also have to do a lot of analytics because you can say, oh my gosh, this is great. You know, there's a Ford preferred trading at a 9 yield, but you don't realize it's trading at 26, call 25 and it's going to get called any time or it might already been called. So you do have to do a lot of work. You don't want to be in low quality credits, got to manage the interest rate risk. You can do it yourself, but it's simpler. Like I don't do it in either my personal account. I have levered PFFA in my personal account IRA 60%, 65% PFFA. And the reason for that is that I don't want 200 preferred stocks in my IRA. It's just, it would be an unbelievable mess. It's not worth it for me to go in and manage each security and say, oh well, I have a thousand shares of this preferred and is trading at 2550 and I'll sell it. Like I don't have time to do that. I have to of course manage pfa. But even for anybody that just like it's not really worth your time, like it's. If you have a diversified portfolio preferred, why bother? But for us, we have hundreds of thousands of shares and we have institutional trading techniques to, you know, take advantage of that. So there's economies of scale for having an ETF managed, you know, by people like us where it's absolutely worth our time to worry about whether you sell it at 2550 or 25 and a quarter or 2575. So a unique situation where, like I said, perfectly reasonable to go buy your own stocks, do your own work, but way simpler, or buy an ETF that's just an index fund, but Harder to do it yourself on preferreds and bonds. Bonds aren't usually listed and can create a big distraction in your portfolio when you should be worrying about selling Tesla at 475. You're staring at all these preferreds moving around by 5 cents every day.

[Anthony Chavon]

I guess we'll wrap up here with two more sort of questions on the economy. So I'm curious if you have any thoughts on the massive capex boom that we are currently seeing and the potential implications for real assets. Like when I look at big Tech and the Mag 7 companies, these have historically been asset like businesses that's almost exclusively invested in the digital world. But now those same companies are investing hundreds of billions into the physical world. So I'm curious if you have any thoughts on how this capex boom kind of impacts physical assets like real estate, energy and some other old economy stocks.

[Jay Hatfield]

Well, I guess my reaction would be thank God because you know the normal cycle. So the Fed raises rates of course the 10 year goes up as well, usually about 100 over whatever the Fed raises it to and then housing and construction creator which they have. And you can get that data on our website. I mean it's on. That's just public data. But we summarize it for you in a slide on our website. So the old economy, so construction and housing are in recession. So over the last year those investment categories have dropped and by the way investment drops create all recessions. But intellectual property, AKA you know, AI investment and equipment, which a lot of that's semiconductors and also could be data centers and could be power, is actually pretty strong. And so those two kind of cancel each other out and we have modest growth. We think next year will be really good. But so we agree with you 100% because we are around for the Internet boom and it completely busted. Investment went down, but it was really, as you're pointing out, just some laptops and a bunch of tech engineers. It didn't really have that big an impact on the economy. We had a very shallow recession, 0.6% because it didn't impact data centers and chips and all these other categories. So we might get a cycle in the future. It's not housing driven, but it's solely driven by a cycle in tech because it is kind of impacting the whole economy, not just software and laptops and tech engineers.

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[Anthony Chavon]

Just to follow up, in a recent interview you briefly mentioned something about what you referred to as the Hatfield Rule as it relates to home building and the economy. Can you just briefly explain to us what is the Hatfield Rule? Because I think it's interesting concept, especially considering the the current state of the housing market, right?

[Jay Hatfield]

So that also is meant to be slightly amusing because there's a thing called the Psalm Rule, which is when employment rises quickly over six months. So we thought, you know, it's a free country, so we'll come up with our own rule. But if you really look historically, as I mentioned, all recessions don't come from the consumer. So everybody's wrong about that. Everybody on television's wringing their hands about the consumer actually comes from drop in investment and 12 out of 13 post World War II recessions were caused by housing declines. And if you draw a line, we have a chart that shows this. You can see that once we go below 1.1 million, we do have a recession. And that was obviously the key driver in 2008, but it's been the key driver except every recession except that 2001 recession. Global rates are dropping, so housing hung in pretty well and all the drop was in the tech categories, but it was an extremely mild recession. So it is critical. So if you Buy into our methodology of focusing on money supply, which is the Fed and oil. Then the way though, you need to also assess what's happening is look at the housing market. And that's why we had to call all year long that the Fed would cut three times because we thought that the housing market was going to slow and then the labor market was slow. We looked like we were wrong for a while because the BLS takes a long time to figure out when the employment market's declining. So if you just have those three components, the Fed is the most important and then housing, we're really just two. You can predict the inflation and economy nearly perfectly. You just have to make sure, of course oil's not going to infinity, but that's not going to reoccur unless we have wage and price controls. Everybody kind of forgets oil was capped at 10 bucks a barrel, world price was 40. Our production went to near zero. And that made the oil crisis way worse. So not likely to occur in the future on the oil side. So watch the Fed and housing. You don't need to listen to me pontificate. You could do it yourself and make your own forecasts. And we've been doing that since the pandemic. And like I said, historically it's been very accurate and strongly. If anybody cares about macro, which you should if you're an investor, watch the money supply easier use the base comes out every Thursday. Or look on our website. We keep track of it. I've been keeping track of it for 45 short years, ever since I studied monetarism in college and it's kept me out of trouble. If you followed that, you would have been able to predict the every recession really well.

[Matt Arger Singer]

Jay, thanks again for giving the Motley fool some of your time today. I know this is going to be really helpful not only to, you know, our members that own PFFA or are already interested in preferred equity, but we have a large member base who would who have probably never explored the asset class. And so I think they're going to find this super, super interesting. Thank you so much.

[Jay Hatfield]

Great. Thanks, Matt. Anthony, great questions.

[Matt Greer]

As always. People on the program may have interest in the stocks they talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by editor advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for the Motley Fool Money Team, I'm Matt Greer. Thanks for listening, and we will see you tomorrow.