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

There are basically 2 types of preferred shares. Perpetuals and resets. One goes on with the same yield forever and on the other the rates are reset periodically. In January they all got clobbered because Bank of Canada cut the rates and the companies reset at a lower rate. Actually this is a pretty good time to be buying these. This one yields about 5.25%. He likes this.

The reset prefereds they hold are linked to 5 year Canada bonds. There is indiscriminant selling from retail investors that are scared. He thinks you have to stick with it.

Preferred shares reset to the 5 year government of Canada bond. In a falling interest rate environment you get better performance from perpetual preferreds rather than from reset preferreds.

Decent dividend. Preferred shares have been out of favour since 2008. This ETF is recovering and will continue to do so. The tax advantages to dividends are far higher than for bonds. He does not see a lot of risk. He prefers this to the bond market.

These reset preferreds are linked to the 5 year bond. So when the reset provisions come into play, if the bond yield is much lower, then the new coupon payment is going to be a lot less on the preferreds. They are more linked to fixed income than they are to equities. So if equity markets fall 10% on a correction, preferreds might fall 1%-2%, or sometimes they might go up depending on what is happening to interest rates at the time. They are a good diversifier because of this to get yield. He uses it by increasing his preferred exposure versus common. For example ZDV-T is the way to play high dividends in the Canadian market, which is 50 of the best dividend payers. When he fears the risk on the common shares, he wants a little more exposure to ZPR and when he feels the outlook is more for growth, he wants more ZDV. Meanwhile they both yield him more than 4% and it is a nice way to get Canadian tax efficient dividends in your taxable portfolio.

He has a position of this and it has been doing horribly. The reset preferreds link to the five-year Canada bond. At about the $13.40 point, the Gov of the Bank of Canada surprised every analyst and every portfolio manager in Canada by doing a rate cut. Because of this, the five-year Canada bond plummeted in weeks. It stabilized for a while and he started adding, but it now seems to be in a panic phase where individual investors are selling these holdings. Institutional investors, from what he hears, are buying on the other side of this. He still holds his. It is a fine way to diversify.

Preferred shares have been really hit lately. He has never been a fan of preferreds. You are getting a return of bonds and the risk of stocks.

Laddered Preferred ETF. It is similar to the 5-year government of Canada rate because of the preferred resets. He looks at these as a way to diversify, but if interest rates go down in Canada it will suffer.

Some people like Preferreds in a ladder, but that is not his preferred way of doing it. Most people don’t think of a ladder as being that important.

Preferreds have their place in everyone’s portfolio. You could have 5 to 15% depending on your outlook on preferred shares. He uses them in his sleep at night portfolio.

Preferred resets trading off the 5 year bank of Canada. He owns ZPR-T. These are a hybrid between fixed income and equities. Just hold the ETF and collect the yield.

Preferred Resets. They benchmark off the 5 year Bank of Canada bond which dropped off last week. It should begin to recover in the next few weeks.

He likes that this doesn’t have any of the perpetuals. On any of the ones they have, the dividends can be reset. The problem with perpetuals is that when rates go up, you are going to get clobbered.

The one thing about this is that it doesn't have Perpetuals in it. The perpetuals are the ones where it is a fixed rate, and they're very subject to interest rate changes. He has recommended this in the past. It is a good one.

He likes preferred ETFs even less than the bond ETFs. ETFs work well when you have a very liquid market. However, preferreds are not liquid, so you will see these ETFs always lag the benchmark, because they are basically trading after the benchmark makes its changes. They do poor execution when they do their big swings. Basically you are paying a fee for subpar performance.