CanETF Portfolio Trade #5: Patient Purchase of (Canadian) Preferreds

In the October update, Canadian preferred shares were mentioned as a potential new holding. They have fallen substantially since then. The initial dip below $14 was tempting, but patience paid off and within weeks a much better price was available.

CPD 11262018

The CanETF Portfolio bought 100 shares of iShares S&P/TSX Canadian Preferred Share Index ETF (CPD) at $12.85. (This is the first trade to include a commission, which cost an extra $0.35 CAD. Although Questrade offers free purchases of ETFs, this additional cost is not covered as explained by their footnote “Other fees, such as data, Exchange and ECN fees may apply”.) The solid current trailing yield of 4.6% and the diversification potential are appealing. To the extent the fund holds a majority allocation to rate reset preferred shares, rising interest rates are be beneficial since the dividend rate is expected to reset at a higher level. This should pair well with existing CanETF Portfolio holding iShares U.S. Preferred Stock ETF (PFF), which is primarily perpetual preferreds. CPD also holds some perpetual preferred shares, which typically decline with rising interest rates.

Trade 5 Order CPDTrade 5 Filled CPD

Trade 5 Confirmation CPD

At long last, some of the Canadian dollar cash balance of the Portfolio has been invested.

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$3,714.6531.92%
CPD$1,282.0011.02%
CAD TFSA Total$4,996.6542.94%
USD RRSP
Cash$3,105.9726.69%
PFF$1,871.2516.08%
VWO$1,028.248.84%
FREL$633.455.44%
USD RRSP Total$6,638.9157.06%
Grand Total (CAD at $1.3230 per USD as of 11/26/2018)$11,635.56100.00%

The Canadian ETF market offers a deep roster of viable candidates for the Canadian preferred share asset class. In fact, CPD is only the third largest fund, behind BMO Laddered Preferred Share Index ETF (ZPR) and Horizons Active Preferred Share ETF (HPR). Other passive and active offerings are also available. CPD was chosen because it provides the broadest coverage of the Canadian preferred share market and does so at the lowest cost (both CPD and ZPR have a management fee of 0.45%).

Tracking the Solactive Laddered Canadian Preferred Share Index, ZPR invests only in rate reset securities. This means perpetual, retractable, and floating rate preferred shares are excluded. The result is a more focused ETF for those interested only in the rate reset issues, but at the expense of being an incomplete representation of the overall Canadian preferred share market.

What is admirable about HPR is that its of 0.55% is only 10 basis points more than the cheapest passive alternative. That’s not the only impressive thing about this active approach to the Canadian preferred share market. The fund has outperformed the two passive giants (ZPR and CPD) with less volatility since inception (source: Morningstar.ca data as of 10/31/2018). This is a compelling active fund, demonstrating a strong track record and charging a tiny premium to do so. The only hesitation in choosing HPR was the preference for a passive approach as a foundational piece of the Portfolio. If future funds are allocated to this asset class, this fund will receive serious consideration.

The CanETF Portfolio is not meant to be taken as investment advice. Please conduct due diligence on any ETF investment you are considering, including but not limited to a review of the prospectus, underlying benchmark methodology (if applicable), portfolio characteristics, holdings, performance since inception, role in your existing portfolio, and outlook for future performance.

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