Opinions
Daniel Straus
Horizons Active Preferred Share ETF
HPR-T
COMMENT
Jan 13, 2017
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 often gets asked about preferreds, because it is a very popular asset class for retail investors and has a very nice yield. Lately it has been extremely volatile. A very small market, anywhere between $40 billion and $60 billion. Because it is so small and the issues are so complicated, this is one of the few areas where active management may be able to help the investor. It is actively managed, not an index product, and has handily outperformed the S&P/TSX Preferred index. Buying an ETF for this asset class makes a lot more sense than using an individual issue, because you are diversified and you have the active management as well. Dividend yield of 4.2%.