Preferred shares, or preferred stocks, are great investment options for retirees looking to live off passive earnings and have a stable monthly income after retirement. This often-underutilized asset class offers financial security because of its high yields and solid income. However, before investing in this type of share, it can be beneficial to know the basics of how they work, especially to your advantage. So let’s take a closer look at preferred share ETFs, some examples best known in Canada, and how and why these can become your most significant investment in the future.
For Your Preference: Definition of Terms
Before we even start discussing some of the best preferred shares ETFs in Canada, let us first define terms in our discussion today that are important in understanding what we are investing in in the first place. Here are some of them:
Preferred shares are specially structured shares set up by a company. What separates preferred shares from common shares is that investors holding preferred shares do not have the right to vote. Holding preferred shares does not give you any say during annual general meetings. In addition, you are not involved in the board of directors election or in voting on any corporate policy.
Another factor to note is the similarity between preferred shares and bonds. Preferred shares are set up in a typical fashion that guarantees dividends fixed in perpetuity. Compared with common shares, which have dividends declared by the board of directors and are never guaranteed, preferred shares dividends have set amounts and are of utmost guarantee. With that being said, just like bonds, prices of preferred shares are highly dependent on the latest interest rates. Values of preferred stocks decline as interest rates rise, and vice versa.
In essence, preferred shares are best for investors looking for a more stable and secure source of dividends, are good with no voting privileges, and have very minimal potential in share price appreciation.
Preferred Share ETFs
On the other hand, preferred shares ETFs are types of ETFs or Exchange-Traded Funds that capture collections of preferred shares. These are particular types of stocks that profit from dividends but do not provide voting rights.
Essentially, preferred shares are hybrid in providing securities that pay dividends, much like equities. Canadian preferred shares have the eligibility to get a dividend tax credit. Investors can trade on the stock market using preferred shares ETFs. However, these ETFs on the stock market are not as volatile as equities. However, they are still affected by the movement of the market. Investors who choose preferred shares ETFs usually consider the fixed-income nature of this asset class. Unfortunately, the fourth quarter of 2018 saw a 10% loss in the S&P/TSX preferred share total return index. This incident proved that preferred shares ETFs are also subjected to the risks of the equity market.
Like bonds, preferred shares are also sensitive to interest rates, having many classes or types. So, when a company-issued class of preferred shares goes public, these can bear an end date, fixed or floating distribution rate and other similar features bonds also have.
In essence, preferred shares are an asset class that falls between stocks and bonds. Thus, you can use them to tweak portfolios and replace the potential equity or corporate bond portions. However it is not highly recommended to use them as substitute equities because preferred shares have no participation in the upside. This means that it’s a significant no-go for investors with long-term investing horizons.
Understanding Preferred Shares
After defining terms important in our quest about preferred share ETFs, let us know some of the fundamental aspects of this asset classwork. Let’s go!
Preferred shares are unique and are often underutilized among asset classes. In a low-rate environment, preferred shares deserve reconsideration from investors who want to earn monthly income from their portfolios.
One distinguishing aspect of preferred shares is their higher-than-average dividend yield compared to their non-preferred counterparts. In addition, perhaps best among everything, dividends are paid monthly instead of quarterly – a standard characteristic among preferred shares.
Although high-yielding, this asset class is not without drawbacks and tradeoffs. For one, investors in preferred shares do not possess the same rights and privileges as holders of common stocks, have no vote in company affairs and have no stake in future profits. Instead, preferred shares are more like a debt instrument with rights to a company’s assets above ordinary shareholders and below creditors and bondholders.
How to Invest Preferred Shares in Canada
Finding the best preferred shares in Canada can be taxing and challenging, especially for DIY investors. There are preferred shares that are rate-reset, callable, cumulative, convertible, and numerous other preferred shares types that businesses find attractive in their issuance to investors. Compared to common stock purchasing, preferred shares can be difficult to decipher, especially in choosing which will be right for you.
With everything said, preferred share ETFs can indeed become the best investment for our retirees. Instead of understanding each type of preferred share, investors can go ahead and purchase ETFs that hold hundreds. Investing in the best preferred share ETF in Canada can be the most significant decision for those who want to earn significant dividend income from their portfolio.
How Preferred Shares Are Taxed
For Canadian investors of taxable accounts, preferred shares and preferred share ETFs are the most attractive tax efficiency. Contrary to bonds and bond ETFs with taxed interest payments considered ordinary income, preferred shares profit from dividends. Already a known fact, dividends in Canada are favourably taxed much more. Yields with high dividends, together with chances of reduced-price appreciation, make preferred share ETFs ideal for investors looking for additional income to their taxable accounts. In addition, ETFs which hold Canadian preferred shares have incomes not subjected to foreign withholding taxes.
Although preferred shares share similarities with bonds, bonds have lesser tax efficiency between these two. Preferred shares have a lower tax rate because the Canadian government taxes the payments with interest from bonds and bond ETFs as ordinary income. On the other hand, preferred shares dividends get taxed as eligible dividends and get tax treatment favourably. As a result, you can even become more tax-efficient, holding preferred shares ETFs inside a TFSA or RRSP.
For Your Preference: 5 Best Preferred Share ETFs
Now we already know the whats and the hows; it’s time to list down 5 of the best preferred share ETFs in Canada and why they are the best to consider an investment during retirement.
IShares S&P/TSX Canadian Preferred Share ETF
- Ticker: TSX: CPD
- Fees: 0.45%
- MER: 0.50%
- Dividend Yield: 4.3%
- Assets Under Management: $1.5 billion
This preferred shares ETF seeks to replicate, as much as it can, the S&P/TSX Preferred Share Index – performance and net of expenses. The underlying S&P/TSX Preferred Share Index comprises preferred stocks listed and traded in Canadian dollars on the TSX.
Preferred shares issued by companies have to meet requirements in finance or capital, which include preferred shares that are fixed-rate and floating, cumulative and non-cumulative, and those with callable or conversion features. In addition, these preferred shares must market a capitalization of higher than $100 million on or before the monthly rebalancing reference date, considering the last ten trading days for it to be eligible for the Index. The oldest ETF in the list, The iShares S&P/TSX Canadian Preferred Share ETF, has track records indicating its ups and downs. Investors can use this ETF to gain exposure to diversified Canadian preferred shares portfolios. You can also use this to diversify income sources beyond GICs and government bonds.
Horizons Active Preferred Share ETF
- Ticker: TSX: HPR
- Fees: 0.55%
- MER: 0.64%
- Dividend yield: 4.65%
- Assets Under Management: $1.8 billion
This preferred share ETF has the investment objective of providing dividend income and, at the same time, preserving capital for its investors. They aim to achieve this goal through investments primarily focused on preferred shares provided by Canadian companies. They are also an incorporated exchange-traded fund in Canada.
Horizons Active Preferred Share ETF also potentially invests in preferred shares from US-based companies, with fixed-income securities between Canada- and US-based issuers, including other income-generating assets.
They also make potential investments in equity securities and index participation-issued ETF units in Canada. Finally, as much as it possibly can, this ETF seeks to hedge its non-Canadian dollar currency exposure to the Canadian dollar all the time.
They are an ETF actively managed, not seeking to replicate the performance of any underlying reference benchmark. They are also designed for performance tracking of the Canadian preferred share market. As a result, the composition of this ETF’s portfolio can drastically vary in materials from that of the Index from the constituent issuers and weightings.
Invesco Canadian Preferred Share Index ETF
- Ticker: TSX: PPS
- Fees: 0.45%
- MER: 0.51%
- Dividend Yield: 4.59%
- Assets Under Management: $89.7 million
This preferred share ETF is an exchange-traded fund incorporated in Canada. They seek to replicate the performance of the NASDAQ Select Canadian Preferred Share Index up to the possible extent, before fees and expenses. They primarily make investments in preferred shares issued in Canada.
They are a variation of the indexing theme and are part of the six ETFs that invest mainly in preferred Canadian shares with at least three years of history. Invesco Canadian Preferred Share Index ETF is the sole, above-average Morningstar-rated ETF that offers risk-adjusted historical returns.
They combine 100 of the highest-yielding and lowest-volatility dividends-paying preferred stocks in the current stock market. The underlying NASDAQ Select Canadian Preferred Share Index is a modification that is marketed for a capitalization-weighted index.
This Canadian energy ETF primarily consisted of preferred shares from financial institutions and preferred stocks from energy sectors; this ETF historically showcased low correlations of investments in common equity and investment-grade fixed-income securities.
RBC Canadian Preferred Share ETF
- Ticker: TSX: RPF
- Fees: 0.53%
- MER: 0.58%
- Dividend Yield: 4.41%
- Assets Under Management: $951.2 million
The preferred share ETF aims to provide its investors with exposure to performances of a diversified portfolio, primarily those of Canadian preferred stocks. This ETF’s ideal portfolio includes Canadian preferred shares, which promise to provide investors with a combination of regular income and a long-term capital growth potential.
This ETF primarily has actively managed investments in a portfolio of rate-reset preferred shares issued by Canadian companies trading on the TSX. They select preferred shares within their portfolio, basing the selection on fundamental analysis, credit research, and interest rate sensitivity analysis.
They also potentially hold preferred shares issued by Canadian companies that are not reset-preferred shares, those fixed-income securities issued by Canadian companies, Canadian stocks with DRIP or governments, common stocks which are dividend-paying from Canadian issuers, and US-issued preferred shares along with other Canadian ETFs.
BMO Laddered Preferred Share Index ETF
- Ticker: TSX: ZPR
- Fees: 0.45%
- MER: 0.50%
- Dividend Yield (12-month trailing): 4.74%
- Assets Under Management: $2.2 billion
This preferred share index ETF, by nature, is designed to replicate, to the extent possible, the performance of the Solactive Laddered Canadian Preferred Share Index, net of expenses. The Solactive Laddered Canadian Preferred Share Index includes Canadian preferred shares that qualify the listing, liquidity, size, and quality criteria.
This ETF is designed for investments looking to bolster the passive income in their portfolios. This Index utilizes a five-year laddered structure with equally-weighted annual buckets, with securities within each bucket that are market-capitalization-weighted.
This index ETF has many benefits, making it one of the best-preferred shares ETFs in Canada. They are invested and committed in a portfolio diversified by the rate reset preferred shares.
With its sensitivity to lower interest rates, unlike the total preferred shares market, this ETF has even more stability than others. In addition, they are professionally managed by BMO Global Asset Management – an advantage superior to many other peers.
Preferred Shares For Your Preference: Final Thoughts
We all want our retirement to become as good as we want it to be. So, if you are nearing retirement or have already retired and want to have a stable source of income that is high-yielding, preferred share ETFs may be what you are looking for eventually. It may be easier for you to utilize one of these best-preferred share ETFs than to hold individual preferred shares. Unless you prefer doing your research and figuring out which preferred shares to have in your portfolio, go ahead and take advantage of all the information stated here today. So, for your preference – this is helpful information about the best-preferred share ETFs in Canada. You can also look at our list of REITs in Canada for stable income and investment security.
Best Preferred Shares Canada
There is a massive landscape of Canadian ETFs, but some have not been cut, so that we will focus on the best-preferred stock ETFs in Canada. Discover some of the most popular and famous preferred stocks in the US and Canada and understand why they are a good choice for those who want to invest in preferred stocks in Canada.
ETFs in Canada is the only one that offers risk – an adjusted historical return of more than 10% per year for the past ten years.
It follows a preferred stock structure comprising Canadian preferred shares, which generally have adjustable dividend rates. This makes it a strategy that combines the best of both worlds – a low-risk, high-return investment with a high dividend ratio. This is achieved by replicating the long-term performance of a particular investor’s preferred stock portfolio rather than a single asset.
What makes HPR unique is that Horizons claims that the fund can invest in assets that many would not consider high-risk – namely, a traditional preferred stock portfolio. Looking at fundamentals, it offers returns of around 5% and the best-preferred stock ETFs in Canada are competitively priced, with an MER of approximately 0.55.
Meanwhile, there are several other types of preferred shares that companies want to issue to investors. In particular, preference shares appear to trade at levels where they offer the best value. Preference shares may allow holders to convert their preference shares into a certain number of common shares at specific prices or exchange them for shares at exceptional prices. The ETF may also hold preferred shares of Canadian companies that are not reset or preferred to fixed-income securities issued by the government and dividends paid by ordinary shares.
Purchasing preference shares can be more attractive than buying bonds because most of them reset an interest rate, i.e. the interest rate does not pay a coupon. If you select a company with an increased dividend on its common stock, you can reduce the risk of a dividend cut by cutting the preferred stock dividend. The common shares pay their dividend at the same rate as the common shares payable.
Preference shares can also be a poor investment due to their high interest rates and the high risk of dividend cuts. However, preference stocks do not behave as weakly as bonds because they are not as risky.
However, I have listed the best-preferred stock ETFs in Canada currently traded on the TSX. If you want to use a rate reset ladder for your preferred stock, you can invest in an ETF. ETFs have a much higher yield than the S&P 500 and are much less risky than traditional preferred stock investments. The ETF tracks the US government bond market and the US yield curve so that you can invest in it with a lower yield and higher risk of dividend cuts.
Preference shares have a face value to bonds, meaning that interest plays a significant role in pricing. The preferred shares of Canada’s largest banks trade in a rising interest rate environment, meaning TD Bank’s shares will yield a similar return to BMO’s. If you compare the preferred share prices of the two largest banks in Canada and the US, you will find that preferred shares are traded with a much higher yield than common shares in the US, which means they are more vulnerable to a price reset. Preference share prices are more stable than ordinary shares but can change significantly. Check the TD monthly income fund price for more info.
This is an exceptional choice for anyone wishing to add preference shares to their portfolio. The best preferred stock ETFs in Canada all hold many of the same issues as preferred shares and are all traded on the TSX. We rank bonds and stocks by the yield that preference shareholders pay to bondholders and the daily liquidity that preference holders provide through trading on exchanges such as the Toronto Stock Exchange and the Canadian Securities Exchange.
ETFs hold many preference stocks, but the interest reset component is the largest. The primary investment is in interest rates – the preferred shares of some of Canada’s largest companies are being reset – and RPF is offering investors a 5.50% dividend at just $0.58 per investor.
For Canadians investing in taxable accounts, preference stocks and preferred stock ETFs are two of Canada’s most popular investment options. High dividend yields, combined with a reduced chance of appreciation, make them a good choice for investors looking to top up their taxable income. What sets these preferred stocks apart is their high dividend yield compared to the S&P 500 “s 5.5% average and low price-to-earnings ratio.
Choosing a preferred stock ETF in Canada means you don’t have to worry about researching and maintaining different preferred stocks. Low costs and high returns are the obvious preconditions, but consider how easy these funds are to trade when buying preferred stock ETFs. Preference shares do not have the liquidity of common shares, so they are more expensive to invest in.