Horizons Active Preferred Share ETF

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.

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.

Preferred share market in Canada has become complicated with all these resets. HPR is actively managed. Would work pretty well in rising rate environment.

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.

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.

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%.

(A Top Pick Sept 23/15. Up 8.53%.) He likes preferred shares in general as an asset class. What he likes about this one is that unlike the US side, this is a pretty plain-vanilla fixed rate preferred perpetuals. He likes that it is an actively managed ETF.

He is finding his clients have a real need for income, and you can’t get that in the bond market. The only way you could is to buy Long Bonds. However, these behave inversely to interest rates, and the 70-basis point rise in US interest rates has really hurt the Long Bond market. Yet it hasn’t impacted the preferred share market. This is a great source of income for yield oriented investors.

Preferreds are a very interesting market. It is not very large in Canada, so is a bit illiquid and small. In a market like that, a little element of active management can be quite helpful. This one has managed to outperform the index steadily and incrementally, which is a rare thing to see.

The pain in the preferred share market was mostly the result of the huge number of Reset Preferreds that came onto the market within the last 5 years, so a lot of these preferreds did not reset their dividend for 5 years, and a lot of them did it this year because it was their 5 year anniversary. When they reset their dividends, they were cut dramatically, because they were based on some value above either a 5-year Government of Canada bond or treasury bill if it was a floating rate, or a 5-year Government bond if it was a reset. In both cases, they came down because interest rates declined. However, preferred shares that have fixed rates, that has stayed the same for a long period of time and are investment quality, they have not done that bad. This one is yielding 5% because they have a collection of quality preferreds and different terms giving you instant diversification.