Jeff Black iShares S&P/TSX N.A. Preferred XPF-T WEAK BUY Jan 11, 2011

Basket of Canadian preferred stocks. But 50% of it is PFF-N

The question on Preferreds really has to do with Perpetuals, in other words, how many Perpetuals are in the particular ETF. This one does have perpetuals and they are going to be battered by any rise in interest rates.

A lot of interesting things have happened in the preferred share market in Canada and the US. Composition has been changing, and there has been more inventory to choose from. He prefers Horizons Active Preferred (HPR-T). He is just there to collect a reasonable dividend and not looking for any major growth. This one is fine and has the US side as well.

Preferred shares can be a replacement for a bond. However they are at the bottom of the debt structure. You want them in your taxable account rather than sheltered account. The ETFs had got too big and liquidity is a problem for them. You could be better buying the preferreds on your own.

How will this react in a rising interest rate environment? Preferred shares act like bonds, so in a rising interest rate environment, the value of the preferreds will go down. This one is hedged to the Cdn$ which is why your performance is probably down because you have a big bang in the US$ and you haven’t taken advantage of that. However, iShares has changed the way they manage this, to the point where they got a little bit more flexibility in the types of preferreds they hold. They are able to hold and buy reset preferreds. If you own resets in a higher interest rate environment, in theory it shouldn’t be as volatile.

Half is exposed to US preferreds. In the US, preferreds trade more like bonds because most don’t have reset provisions. Interest rates are rising in the US and falling in Canada so that is not good for this ETF. He likes this one because you get the mix. Protection from rising rates in Canada and falling rates in the US. It is currency hedged.

A year ago all the rate reset preferrds got set lower down. He is not a big fan of this although he has a bit.