Rob Carrick: ETFs for investors who want preferred shares, but understand how tricky they are – The Globe and Mail

The best way to document the challenge of handling preferred shares is to look at their weak 10-year returns.

The S&P/TSX preferred share index pulled off a total return of 20.6 per cent for the 12 months to Nov. 30. Even with that impressive surge, the index produced an annualized 10-year total return of just 3.2 per cent. Pref share investors have seen some trying times in the past 10 years, including a decline of almost 8 per cent in 2018.

A thought for investors who value the reliable dividend income produced by pref shares, but dread the unpredictability of preferreds: Try an actively managed preferred share exchange-traded fund. In fact, prefs may be one of a select few asset classes where there’s an argument for investors to consider active management over passive indexing.

A list of actively managed preferred share ETFs was recently published by longtime pref expert John Nagel of Leede Jones Gable. Some common themes in this group: Index-beating returns in the past 12 months, and frequently in longer timeframes periods as well, and hefty fees.

A good example is the Horizons Active Preferred Share ETF (HPR-T), which is a rarity in its group for having a history going back more than a decade. The 10-year annualized total return to Nov. 30 was 4.2 per cent, the five-year return was 7.6 per cent (compared to 6.4 per cent for the index) and the 12-month gain was 27.7 per cent. These returns were achieved despite a management expense ratio of 0.64 per cent, which compares to about 0.06 per cent for the typical ETF tracking the S&P/TSX composite index or similar.

HPR’s yield is 4.1 per cent compares to about 1.2 per cent for a five-year Government of Canada bond in late December. The yield on HPR looks even better in a registered account, where the dividend tax credit lightens the tax hit compared to bond interest.

Other actively managed preferred share ETFs listed by Mr. Nagle include:

  • Lysander-Slater Preferred Share ActivETF (PR): One-year return of 32.1 per cent, and a five-year return of 6.2 per cent. The yield is just under 4 per cent and the MER is a lofty 1.03 per cent.
  • NBI Active Canadian Preferred Shares ETF (NPRF): A one-year return of 28.5 per cent, a yield of 3.5 per cent and an MER of 0.57 per cent.
  • CI First Asset Preferred Share ETF (FPR): A 12-month return of 24.3 per cent and a five-year return of 7.6 per cent. The yield is 3.9 per cent,  and an MER is 0.8 per cent.
  • Dynamic iShares Active Preferred Shares ETF (DXP): The one-year return is 31.5 per cent, the yield is 3.7 per cent and the MER is 0.67 per cent.
  • RBC Canadian Preferred Share ETF (RPF): One-year return of 26.6 per cent, and a five-year return of 7.5 per cent.. A yield of 4.3 per cent and an MER of 0.59 per cent.

The managers of these ETFs have had some of the most favourable conditions for preferred share investing in ages. They’re also burdened by heavy fees, which makes it harder to beat the index.

Still, the one-, five- and, in at least on case, 10-year results suggest active managers are doing good work in the preferred share world. Take not if handling preferred shares seems a handful.

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