BMO S&P/TSX Laddered Preferred (ZPR.TO)

There used to be perpetual preferreds that did poorly when bonds went up. He does not see a lot of growth here. He has been trading it. He trades a range. He prefers the indexed strategy to going into specific preferreds. HPR-T is an alternative he prefers.

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.

ZPR-T vs. HPR-T. HPR-T is actively managed whereas the other is a laddered, index ETF. The HPR-T is probably a better hold even though the fees are higher.

Rate resets? Has heard a lot more about preferred shares in the last few months than he has in the last 5 years. Where you have to be very diligent is in reading the fine print. What is the reset? How many more basis points are the giving you over Canada's? What is their benchmark? When does it occur? This is a place that you could put part of your portfolio in, you just have to be extremely selective.

Bank of Montréal preferreds are in fact rate resets as opposed to perpetuals, which are by and large from iShares. As rates change, the rates they are paying will change as well. Generally with the preferred, if you are seeing rates going up, they tend to get beaten up a little, but rate resets are a little healthier than that. The yield is good on this and he has no intention of selling his.

Rate Reset Preferreds. With higher interest rates you will get high rates as they reset. He will step in after the next correction.

Laddered preferreds. They do well in rising interest rate environments. Fundamentally it is not cheap here. He got a lot a year ago. He does not like the relative value here. He would buy into weakness on a pull pack. That could happen in December.

How will rising interest rates affect this, up or down? If you believe preferred shares are a little undervalued compared to bonds, higher interest rates are going to have a negative impact. Doesn’t think it will be as dramatic as the impact you would get if holding a bond portfolio. This is not a bad way to hedge your bets on a higher interest rate environment, because as rates go up, they will reset the preferreds at a higher rate to keep the price steady.

How will rising interest rates affect this? This is a “rules based” ETF and is made up of 100% fixed reset preferred shares. In theory, in a rise in rates, this would perform well.

Will the rise in value of this ETF continue? The TD Bank and Bank of Montréal launched some structured products into the market that were linked to the payouts of the preferreds, and they were wildly successful. The demand for these preferreds went through the roof. He doesn’t think this is sustainable and he sold into the rally. He doesn’t like the value up here and is reducing his exposure.

This is expensive now. He has been selling into the strength since December. If it gets back to those levels he would buy back in.

(A Top Pick July 29/16. Up 8.13%.) Has a lot of clients that are really focused on how they are going to get the income they need. Every 5 years, these preferred shares get reset, and they benefit when interest rates are going up.

These are great vehicles, but in an upward climbing interest rate environment, it is going to be tougher for preferred shares, unless a lot of them are rate resets and are hedged to inflation.