Author Topic: Canada - preferred share ETFs  (Read 3497 times)

scottish

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Canada - preferred share ETFs
« on: September 16, 2015, 03:50:45 PM »
I'm in the middle of restructuring our portfolio for retirement, and the tax treatment of dividends in Canada is appealing.

iShares has a Canadian ETF, CPD.TO which specializes in a preferred shares index.    It looks ok, aside from a MER of 0.5% which seems high, but may be a reasonable price to pay for diversity.

I'm doing my homework on this, and I thought to ask "Does anyone have war stories to share about preferred shares investing via ETF?"

Le Barbu

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Re: Canada - preferred share ETFs
« Reply #1 on: September 16, 2015, 07:42:09 PM »
I dont own prefered shares but:

If I have to hold a lot of money in taxable account, zero or very low debt, NW over 1M$ etc

Then, CPD would be considered to take place in my taxable account for up to 10%

MER is high but it is convenient to diversifiy with not much effort, probably one of the best in that category

okits

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Re: Canada - preferred share ETFs
« Reply #2 on: September 17, 2015, 02:37:16 PM »
War stories?  Well, more of a temporary punch in the gut.

I hold some ZPR.TO, which has lots of rate resets.  With the two BoC rate cuts this year the value of my ZPR shares have taken a nauseating dive (close to 20%.) Unimportant for the long term, as they keep churning out dividends and will recover when rates rise, but not very pretty to see that huge red number in the meantime (and I was surprised how much they fell.  I'd always thought common shares were more volatile than preferreds.)

Edit: missing word
« Last Edit: September 17, 2015, 02:55:51 PM by okits »

Le Barbu

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Rightflyer

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Re: Canada - preferred share ETFs
« Reply #4 on: September 17, 2015, 03:51:14 PM »
We have CPD and ZPR.

Both down around 10% overall but as we hold them for the long term it gets less painful reinvesting (DRIP) at 5% yields.


scottish

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Re: Canada - preferred share ETFs
« Reply #5 on: September 17, 2015, 05:17:51 PM »
Thanks.    Several years ago I bought an 'innovative' bond from BMO called a BOAT, without realizing that it didn't have a fixed maturity date, but IIRC it was callable after 5 years.  I like my bonds to mature, otherwise it screws up my bond ladder.   That one worked out ok, because it was called when rates went way down back around 2009.   But ever since I've been much more careful.

It sounds like it's the rate reset shares which are messing with the prices.  CPD and ZPR both look ok as ETFs.

daverobev

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Re: Canada - preferred share ETFs
« Reply #6 on: September 17, 2015, 06:14:02 PM »
I currently have no preferreds. Should I get some?

The TSX is down a lot for the year, so a 10% loss on prefs doesn't sound too bad.

Jon_Snow

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Re: Canada - preferred share ETFs
« Reply #7 on: September 17, 2015, 06:51:43 PM »
Own a decent amount of CPD, most of it purchased AFTER the precipitous drop of preferred shares in the last several month thankfully. In a rising rate environment there will be some capital appreciation of ETF's like CPD...to go with the steady income they provide. I like them.

daverobev

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Re: Canada - preferred share ETFs
« Reply #8 on: September 17, 2015, 07:44:31 PM »
Why do their values go UP when rates do? I have no bonds either, I get the counterweight/correlation thing but I don't care much, but something that pays ok and goes up when rates go up sounds good.

okits

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Re: Canada - preferred share ETFs
« Reply #9 on: September 17, 2015, 08:18:19 PM »
Why do their values go UP when rates do? I have no bonds either, I get the counterweight/correlation thing but I don't care much, but something that pays ok and goes up when rates go up sounds good.

I think the way it works is that when the rate resets (5yr GoC bond + premium), if interest rates are higher the dividend payout goes up.  So to get the ~5% yield investors want from prefs the values of the shares go up (not sure if the return investors want from prefs changes with interest rate movement, or if it just doesn't change in 1:1 proportion.)

What I've been reading to try to increase my understanding:

http://www.greaterfool.ca/2015/07/19/special-2/

"Most preferreds today are called ‘rate-reset,’ which means investors gain protection from rising interest rates since the dividend is reset periodically, based on the Government of Canada five-year bond yield, plus a premium. And if rates soar, the issuers have the ability to recall the shares, giving investors a capital gain. This is reasonable in a world in which it’s a no-brainer that the cost of money will rise over time."

Despite the giant dive in value my preferreds have taken, the dividend income is pretty sweet (if your income bracket is low enough the dividend tax credit ends up being larger than the tax on the dividends...  I may be facing a few low-income years so that's a warm thought.)

powersuitrecall

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Re: Canada - preferred share ETFs
« Reply #10 on: September 18, 2015, 07:23:54 AM »
I'm in a similar position to daverobev (no preferreds).  My portfolio is an extremely simple mix of Equity and Bond ETFs. 

I'm starting to be convinced that Preferreds might be a good deal right now.  Is there a general consensus on what sort of percentage preferreds should take?  How about 10%?  RRSP? TFSA? Either/Both?

Le Barbu

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Re: Canada - preferred share ETFs
« Reply #11 on: September 18, 2015, 08:28:59 AM »
I'm in a similar position to daverobev (no preferreds).  My portfolio is an extremely simple mix of Equity and Bond ETFs. 

I'm starting to be convinced that Preferreds might be a good deal right now.  Is there a general consensus on what sort of percentage preferreds should take?  How about 10%?  RRSP? TFSA? Either/Both?

10% is enough, best place to hold is in taxable (when everything else is maxed out) because of their tax treatment. My thought

powersuitrecall

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Re: Canada - preferred share ETFs
« Reply #12 on: September 18, 2015, 08:40:08 AM »
I'm in a similar position to daverobev (no preferreds).  My portfolio is an extremely simple mix of Equity and Bond ETFs. 

I'm starting to be convinced that Preferreds might be a good deal right now.  Is there a general consensus on what sort of percentage preferreds should take?  How about 10%?  RRSP? TFSA? Either/Both?

10% is enough, best place to hold is in taxable (when everything else is maxed out) because of their tax treatment. My thought

What if sheltered accounts haven't been maxed? 

If they are, I suppose the best place for them would be TFSA, as to leave space in the RRSP for investments which are taxed less favourably.  Are Preferred ETFs still worth it in your opinion?
« Last Edit: September 18, 2015, 08:47:09 AM by powersuitrecall »

Le Barbu

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Re: Canada - preferred share ETFs
« Reply #13 on: September 18, 2015, 10:05:57 AM »
I'm in a similar position to daverobev (no preferreds).  My portfolio is an extremely simple mix of Equity and Bond ETFs. 

I'm starting to be convinced that Preferreds might be a good deal right now.  Is there a general consensus on what sort of percentage preferreds should take?  How about 10%?  RRSP? TFSA? Either/Both?

10% is enough, best place to hold is in taxable (when everything else is maxed out) because of their tax treatment. My thought

What if sheltered accounts haven't been maxed? 

If they are, I suppose the best place for them would be TFSA, as to leave space in the RRSP for investments which are taxed less favourably.  Are Preferred ETFs still worth it in your opinion?
Maybe but not for me. MER are too high and I dont even own bonds. My RESP and TFSA are 100% ZCN and RRSP is about 2/3 VTI-VBR and 1/3VXUS. Overall, my split is 35% Canadian, 45%US and 20% International. 100% stock, average MER 0.09%


daverobev

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Re: Canada - preferred share ETFs
« Reply #15 on: September 18, 2015, 01:06:02 PM »
Oh well, I grabbed 100 ZPR this morning. I'll probably add some over the coming months.