ICAP - ICAP: An Underfollowed 8.17% Yielding Income Fund That Outperformed The Market In 2022

Summary

• ICAP has outperformed the market since its inception at the end of 2021 and has mitigated downside risk well throughout the bear market.
• ICAP has established a track record of generating monthly income and has a forward yield that exceeds 8% based on 2022 dividends.
• In a market where yield isn't scarce, ICAP has the potential to generate high-yield and alpha from the same investment.

When I saw that the InfraCap Equity Income Fund ETF ( ICAP ) only had 553 followers on Seeking Alpha and that Brad Thomas was the only contributor who had written an article about ICAP, I reloaded the page. I was perplexed that the results remained the same. Infrastructure Capital Advisors, also known as InfraCap isn’t a small shop, and manages popular investment products, including the Virtus InfraCap US Preferred Stock ETF ( PFFA ), and the InfraCap MLP ETF ( AMZA ). In an environment where 4% yields were commonly found among CDs and T-bills, I figured ICAP would have gained popularity in the same way that the JPMorgan Equity Premium Income ETF ( JEPI ) had, as it offered a much higher yield than other investment products for taking on equity risk. I was incorrect, and I am quite surprised. For income investors interested in generating monthly income and alpha through an actively managed portfolio that evaluates global macroeconomic factors while conducting extensive fundamental analysis on its positions, ICAP is a fund worth the time to research.

ICAP Vs. The Market which I track using SPY

2022 was a difficult year for many investors as the bear market came out of hibernation. Investors with elevated levels of exposure to technology had fewer places to hide as big tech was no longer a safe haven to ride out the storm. A shift from revenue growth to free cash flow being a driving investment factor occurred, and popular profitless tech companies that were pandemic standouts watched their share prices drop off a cliff.

ICAP’s inception date was 12/29/21, which may have been the worst time to launch an ETF as few investors escaped 2022 with an annualized gain. I like to compare everything to the SPDR S&P 500 Trust ETF ( SPY ) as its one of the most well-known S&P 500 index funds. Regardless if you had taken the income as cash or reinvested the monthly dividends, an investment in ICAP would have significantly outperformed SPY since its inception (1.07 years).

If you had invested $10,000 in ICAP on 12/29/21 and had taken all the distributions in cash, your initial investment would be worth $9,874 compared to $8,517.33 if you had placed that $10,000 in SPY. The total return from ICAP would have been -1.25% compared to -14.83% from SPY.

If you had decided to reinvest all the dividends, ICAP would have declined by only -0.93% over this period, while SPY declined by -14.79%. The $10,000 investment in ICAP would be worth $9,906.59, while reinvesting the dividends in SPY would have left investors with $8,520.52. ICAP’s share count would have increased by 8.52% to 359.67 from 331.42. ICAP just raised its monthly dividend by 3% from $0.175 to $0.18. The combination of the first annual dividend increase and the additional 28.25 shares from reinvesting the dividends would have increased the projected annual income from ICAP by $80.91 or 11.62%. Prior to compounding interest and short/long-term gain distributions, ICAP’s forward annual income would now be projected to generate $776.89 compared to $695.98 from when the initial investment was made.

ICAP doesn’t have a long track record, but I believe it made its bones during the bear market. ICAP’s actively managed strategy and dividend income proved that ICAP could mitigate downside pressure, preserve capital, and outperform the market during periods of uncertainty. It will be interesting to see what ICAP can do during times of appreciation, but the more important question has already been answered as to what would occur in a bear market. ICAP certainly passed with flying colors.

How the InfraCap Equity Income Fund works and what its objectives are

ICAP seeks to maximize income for its investors while actively managing its portfolio to pursue total return opportunities. ICAP will invest at least 80% of its net assets in equity securities of companies that pay dividends during normal market conditions. The Equities that ICAP may allocate capital toward include common stocks, preferred stocks, and convertible securities. ICAP has not placed a limitation on market cap and can invest in companies of any size. ICAP will invest primarily in U.S. equities but may allocate capital toward foreign securities, including securities of companies located in emerging markets. In addition to traditional equities, ICAP doesn’t exclude REITs or MLPs from its investment mix.

Through ICAPs active management, the advisors can utilize put and call options to generate additional income and reduce volatility in the portfolio, remove or add securities from the portfolio, hedge against market risk, and enhance total return opportunities. In addition to writing puts and calls, ICAP reserves the right to enter into swap agreements, including total return swaps. ICAP may utilize swap agreements to gain exposure to the securities in a market without actually purchasing those securities.

ICAP may invest up to 20% of its net assets in fixed-income securities of varying duration, maturity, and credit quality, including debt securities that have been rated below investment grade by a nationally recognized statistical ratings organization. ICAP utilizes leverage and is approved to borrow up to 33.33% of its total assets from banks for investment purposes. Under normal market conditions, ICAP looks to deploy between 20-30% of its leverage capacity.

The InfraCap Equity Portfolio, and why I have become a fan

I downloaded the complete holdings of ICAP and am impressed with the overall portfolio. I am currently a shareholder of Enbridge ( ENB ), The Coca-Cola Company ( KO ), and Simon Property Group ( SPG ), which can be found in their top-ten holdings. Looking through the rest of the portfolio, I am a shareholder of Kinder Morgan ( KMI ), Energy Transfer ( ET ), AT&T ( T ), Verizon ( VZ ), Altria ( MO ), Southern Company ( SO ), AGNC Investment Corp ( AGNC ), National Retail Properties ( NNN ), Kraft-Heinz ( KHC ), Vornado Realty ( VNO ), Realty Income ( O ), Starwood Property Trust ( STWD ), AbbVie ( ABBV ), Citigroup ( C ), ONEOK ( OKE ), New York Community Bank ( NYCB ), Walgreen Boots Alliance ( WBA ), STAG Industrial ( STAG ), 3M ( MMM ), VICI Properties ( VICI ), Exxon Mobil ( XOM ), and Algonquin Power Utilities ( AQN ).

ICAP has 108 individual positions and has written 80 sets of call options against its positions. I like the way management has staggered the options. For instance, they sold covered calls against MO at a $47 strike price, expiring on 2/23 and 3/23, and at a $49 strike price expiring on 1/23 and 2/23. In some cases, it looks like management has written puts to protect the downside in positions such as T and XOM, but the majority of the options are covered calls across multiple expiration dates and strike prices.

Personally, I like funds like this. I am invested in traditional S&P 500 index funds, but I also want exposure to different types of investments. I am more than happy to allocate capital toward funds like ICAP because management is earning their expense ratio of 0.80% by assessing the macroenvironment and utilizing a call overlay strategy to generate additional income. I write covered calls against some of the dividend stocks that I feel are going to trade sideways and cash-backed puts on positions I want to own at a lower price point. I look favorably upon actively managed funds that take a methodical approach to generating income through these methods, as covered-call strategies are well within my risk threshold.

The InfraCap Equity Portfolio generated monthly income in 2022, and provided an annual dividend increase in 2023

In 2022, ICAP delivered on its income promises and produced a monthly dividend of $0.175. In December of 2022, the dividend was bumped up to $0.326 as long, and short-term capital gains were distributed at year’s end. Overall, ICAP generated $2.25 in income throughout 2022, a forward yield of 8.15% based on the current share price. ICAP also provided shareholders with its first annualized dividend increase in 2023 of 3%, pushing the monthly dividend to $0.18. ICAP is establishing a positive income track record, and after a full year since its inception, the advisors have left no reason to doubt ICAPs income generating capabilities.

Conclusion

I am a shareholder of PFFA and AMZA, and after conducting my due diligence on ICAP, I am ready to make this an upcoming addition to my Dividend Harvesting Series on Seeking Alpha in addition to my larger dividend portfolio. As I write this article, I am not currently invested in ICAP, but there is a strong possibility that by the time this article is published, it will be part of my dividend investment mix. Before making any investments, please conduct your due diligence and ensure that it fits your investment criteria. I have much overlap between my portfolio and ICAPs, and I agree with how they utilize leverage and write their options. Just because this investment meets my needs and is within my risk tolerance doesn’t mean it will meet your needs, so please do your own research. ICAP has outperformed SPY since its inception, provided monthly income, has a forward yield that exceeds 8%, and just raised its dividend. Just like PFFA and AMZA, ICAP has won my vote of confidence.

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