Opinions
Lyle Stein
Horizons Active Preferred Share ETF
HPR-T
COMMENT
Nov 30, 2016
Stock price when the opinion was issued
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Preferred shares are a great investment due to the favorable tax treatment. With active management you are getting a great benefit. They will be holding a balance of fixed versus floating holdings. A casual investor can get caught in the various different covenants associated with this class. He thinks this is an excellent way to add preferred exposure to your portfolio.
ZPR-T vs HPR-T? Preferred shares in Canada are subject to resets, so they’re a great thing when interest rates rise. But when rates go down, they get creamed. It’s unlikely that rates will go down anytime soon. ZPR-T is laddered, and very short term and floating rate. Not a bad strategy. A better strategy would be HPR-T, which is actively managed by Fierra a fantastic manager in the fixed income space. The price on HPR-T is kinda in the same category as ZPR-T but you get the advantage of Fierra without paying a lot. Prefers HPR-T to ZPR-T.
For recent years, he's been off and on preferred shares. Preferreds are volatile. When interest rates plunged 2-3 years ago, this asset class got reamed. HPR pays a big dividend, but also offers huge volatility. Also, it lacks the growth of stocks but carries the volatility. He had a terrible experience with this. Look at ZUP-T, which covers US preferreds which are largely fixed-rate, a key difference to Canadian preferreds. Also, US preferreds are less volatile than Canadians.
He is finding his clients have a real need for income, and you can’t get that in the bond market. The only way you could is to buy Long Bonds. However, these behave inversely to interest rates, and the 70-basis point rise in US interest rates has really hurt the Long Bond market. Yet it hasn’t impacted the preferred share market. This is a great source of income for yield oriented investors.