Opinions
John Hood
Horizons Active Preferred Share ETF
HPR-T
HOLD
May 11, 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.
Active preferred share ETF. ZPR-T is almost entirely resets, but HR-T is 70% resets and 30% perpetuals. If there is another down stroke in interest rates, this one could retain its value more. But ZPR-T could retain its value better during rate increases. Do a little of each. He is not a big fan. If you need the income then stay with it.