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ETFs and Funds Income Investing Investing

3 Canadian Preferred Share ETFs for Steady Income

I’ve met many people over the years who love their dividend stocks. They buy Canadian staples like Royal Bank, TD, BCE and Enbridge for their consistent, growing (usually) dividends.

If you’re an income investor, there’s nothing wrong with this for the equity portion of your portfolio. But there’s a way to get the fixed income side working harder – by using preferred shares.

Preferred shares are hybrid securities that pay dividends (often fixed). Preferred share dividends must be paid out before common share dividends, making them a more reliable source of income.

In the event of a dissolution or liquidation of the issuer, preferred shareholders’ claims on assets are senior to common shareholders but behind debt holders.

The share price of preferred shares can change significantly but tends to be more stable than common equities. This is a positive and a negative, depending on how you look at it. Preferred shares don’t participate in the upside profits from ownership of the company and usually have no voting rights unlike common shares. However, they might decline less than common equities from the same issuer in down markets.

Because preferred shares are often redeemable at a specified par value and pay a fixed dividend, they can have similar characteristics to bonds. Namely, they are more interest rate sensitive than common shares. Because of this, at times the prices of preferred shares can move in different directions to their common stock counterparts.

A big benefit over corporate bonds for Canadian investors using non-registered accounts is certain Canadian preferred shares are eligible for the dividend tax credit. (I.e. a 5% yield on an eligible Canadian preferred share is worth more after tax than 5% on a similar bond.) Another advantage over bonds is the higher pre-tax yield. Of course, this is because bonds are ranked higher in a company’s capital structure and tend to be less volatile.

As you can see, preferred shares are an asset class that belongs somewhere between stocks and bonds. As such, they can be used to fine tune a portfolio potentially replacing some of the equity or corporate bond portion, depending on an investor’s individual situation.

Warning: Over the long-run you’d probably be better off NOT using preferred shares as an equity substitute. They don’t participate in the upside – that’s a big tradeoff for an investor with a long time horizon.

There is a lot to look for when buying individual preferred shares:

  • Credit quality
  • Yield to call/redemption
  • Liquidity
  • Term to maturity – perpetual vs retractable
  • Payment provisions – fixed, floating, re-settable
  • Dividend policy – cumulative vs. non-cumulative
  • Other features

Ideally, a portfolio of preferred shares is diversified by issuer and type. Quite frankly the dumb/lazy investor like myself has no time or energy for this kind of research and maintenance. Instead, I prefer to use an ETF.

Below I’ve listed 3 of the largest preferred share ETFs that are traded on the TSX:

iShares S&P/TSX Canadian Preferred Share ETF (CPD)

This ETF provides exposure to a diversified portfolio of Canadian preferred shares and can be used to diversify sources of income beyond traditional government bonds and GICs.

Key facts (as at May 25, 2020):

  • Yield: 6.05% (trailing 12mth distribution yield)
  • Distribution Frequency: Monthly
  • Top 3 Sectors: Banks (35.83%), Insurance (20.98%), Energy (15.67%)
  • Management Fee: 0.45%

RBC Canadian Preferred Share ETF (RPF)

This ETF provides access to a diversified portfolio of rate-reset preferreds in a single ETF. The ETF is actively managed by investment teams with expertise in company-level fundamental research, credit analysis and interest rate forecasting.

Key Facts (as at May 25, 2020):

  • Yield: 6.81% (dividend yield)
  • Distribution Frequency: Monthly
  • Top 3 Sectors: Financials (59.70%), Energy (22.60%), Utilities (14.80%)
  • Management Fee: 0.53%

BMO Laddered Preferred Share Index ETF (ZPR)

This ETF is designed for investors looking for higher income from their portfolios. The ETF invests in a diversified portfolio of rate reset preferred shares and has lower interest rate sensitivity than the full preferred share market.

Key Facts (as at May 15, 2020):

  • Yield: 6.81% (distribution yield)
  • Distribution Frequency: Monthly
  • Top 3 Sectors (May 25, 2020): Diversified Banks (39.17%), Oil & Gas Storage and Transportation (21.43%), Life & Health Insurance (7.53%)
  • Management Fee: 0.45%
Categories
ETFs and Funds

List of All 17 Gold ETFs in Canada (July 2020)

Many investors are starting to get interested in gold again. You can invest in gold by purchasing actual bullion (bars or coins) from a dealer, by buying a fund that holds bullion, by buying a fund that invests in gold mining companies or by buying a fund that gains exposure to gold via the futures market.

Personally, as a strategic holding I prefer to use exchange traded funds that buy and hold fully-allocated gold bullion. I want exposure to the underlying metal, not necessarily to the factors driving the success or failure of individual gold mining companies. However, during a gold bull market both can perform well.

For Canadian investors, below I have listed out the gold ETFs and closed-end funds that trade on the TSX. For your reference, I’ve also listed how they gain exposure to gold, asset size, ticker and fund manufacturer.

Note: This table is best viewed on desktop

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Categories
ETFs and Funds Investing

Why Oil Price Went Negative Today

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Today, the price per barrel of West Texas Intermediate reached a low of -$40.32. That’s right: the price was negative.

West Texas intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.

Everyone has the same question: How is this possible?

The reality is that there is simply too much oil being produced right now and not enough demand. Production is being curtailed globally, but that takes time. It’s not like a light switch that can simply be turned on and off.

The chart below shows supply and demand for the world oil market going back to 2000. As you can see, most of the time there tends to be minor variance between supply and demand.

In contrast, today the gap between supply and demand is extremely wide. This means there is a massive surplus of oil being produced right now.

That oil needs to be stored somewhere, and as storage capacity is maxed out fewer people are willing to take delivery.

With May 2020 WTI futures contracts expiring on April 21, oil producers are desperate to offload about 100 million barrels. With limited storage and plummeting demand, producers are now forced to pay others to take the oil off their hands. Nobody wants to take delivery and the oil has to go somewhere.

You read that right. Oil producers right now must pay others to take delivery of their oil. Of course, anyone taking delivery must have somewhere to put it and means to transport it. That all costs money. 

As the Covid-19 coronavirus economic catastrophe rages on, it is likely that energy markets continue to implode – at least until supply and demand can be more closely aligned.

Vanguard Energy ETF (VGE), Exxon (XOM), ConocoPhillips (COP), Chevron (CVX) and Canadian Natural Resources (CNQ) are getting hurt badly today. However, the United States Oil Fund (USO) is down even more, more closely reflecting the maturing May contract.

Chart
Data by YCharts

Is this epic collapse an epic opportunity?

Beware if you’re considering buying an ETF that buys oil futures like the United States Oil Fund (USO). These types of ETFs shouldn’t be used to get long-term exposure to oil.

Chart
Data by YCharts

Oil ETFs tend to invest by purchasing futures contracts (i.e. they don’t actually buy barrels of oil). When a futures market is in “contango” (see chart below) futures contracts expiring near-term have a lower price than those expiring farther out into the future. The oil futures market is currently in record contango. Indeed, there is currently (mid-day April 20th) roughly a $50-60 spread between the May and June contract. 

Even if prices along the futures curve for Oil remains constant, when the market is in contango an oil ETF that buys futures contracts will experience a negative roll yield as future contracts approach expiry and converge with lower spot prices. This is a great way to lose money over the long term. Oil ETFs that invest in futures contracts are best used for very short term trades.

If you are brave enough to invest in energy right now as a long term play, I would instead choose an ETF that invests in actual producers. 

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