The Top Canadian Preferred Share ETFs to Buy in December 2024
Among retail investors, preferred shares are arguably known as one of the least popular securities.
Investors don’t always understand what “preferred shares” are. Furthermore, these shares tend not to move much in price, so those comparing stock charts of “common” and preferred shares of the same company may opt for the common share variant.
However, preferred shares make sense for a particular subset of investors: those looking to buy assets that produce income and have lower volatility.
Why? Let’s go over what a preferred share is, and you’ll get a better idea.
Let’s take a peek at some of the top preferred share ETFs to buy in Canada.
Which are the best preferred share ETFs to buy today?
- iShares S&P/TSX Canadian Preferred Share Index ETF (TSE:CPD)
- BMO Laddered Preferred Share ETF (TSE:ZPR.TO)
- Horizons Active Preferred Share ETF (TSE:HPR.TO)
- RBC Canadian Preferred Share ETF (TSE:RPF.TO)
- TD Active Preferred Share ETF (TSE:TPRF.TO)
- BMO US Preferred Share ETF (TSE:ZUP)
- iShares Canadian Financial Monthly Income ETF (TSE:FIE)
iShares S&P/TSX Canadian Preferred Share Index ETF (TSE:CPD)
The iShares Canadian Preferred Share Index ETF (TSE:CPD) is a preferred share ETF from Blackrock and one of the smallest on this list, with assets under management of just under $1B.
As you can tell by the name, the fund primarily invests in preferred shares of Canadian equity securities. It aims to replicate its benchmark, the S&P/TSX Preferred Share Index.
This is highlighted in the fund’s top holdings, containing preferred shares from companies like Brookfield Properties, Enbridge, Royal Bank, TD Bank, and Fortis. In total, the fund holds over 175 different types of preferred shares.
The fund has a dividend yield of just over 6%, higher than typical averages. This is because the fund has been hit with a prolonged downtrend in price due to rising interest rates.
Its expense ratio comes in at 0.5%, which works out to $5 per $1000 invested. That’s pretty reasonable, especially considering it offers single-click diversity to the preferred share market here in Canada.
BMO Laddered Preferred Share ETF (TSE:ZPR.TO)
The BMO Laddered Preferred Share Index ETF (TSE:ZPR.TO) is designed to mimic the Solactive Laddered Canadian Preferred Share Index.
A laddering strategy is one in which a person or fund purchases several preferred shares that have staggered reset dates. This can often help investors grab higher yields during rising interest rate environments.
As a result, you’ll typically see a fund like ZPR yielding more than CPD. However, at the time of writing, they’re around the same, coming in at 5.95%. This isn’t typically the case, and I feel we will see ZPR yield higher in the future.
And not only would you gain access to that higher yield, but you do so with management fees staying relatively the same at 0.5% or $5 per $1000 invested.
The fund invests in preferred shares of Canadian companies, and the top holdings include many blue chips such as Royal Bank of Canada, Enbridge, Emera, BMO, And Canadian Utilities.
With over 164 holdings in the portfolio, this ETF is incredibly diverse. Just four holdings are higher than a 1.5% weighting in this ETF.
Horizons Active Preferred Share ETF (TSE:HPR.TO)
The Horizons Active Preferred Share ETF (TSE:HPR.TO) is the first preferred share ETF on this list that contains US preferred shares. As the name of the ETF suggests, this is an actively managed fund. In terms of its US holdings, it does aim to hedge its non-Canadian dollar currency exposure.
It is also not a pure-play preferred share ETF. It has around 227 holdings, with 18 being bonds at the time of writing. This is less than 10% of the overall portfolio, so this is still an ETF with primarily preferred shares.
Most of its top holdings contain preferred shares from Canadian banks; however, it has preferred shares of Pembina Pipeline, Fortis, and Great-West Lifeco in its top 10.
Keep in mind these holdings, especially in an actively managed ETF, are subject to change quickly. So, if you are concerned about the top holdings, check out the fund’s website.
With this one being actively managed, it does have a little higher MER. You’re going to pay $6.20 per $1000 invested. Assets under management are just under $1B.
It has a dividend yield of 5.40%, perfect for investors seeking high dividend income.
RBC Canadian Preferred Share ETF (TSE:RPF.TO)
If you’re a stickler for big bank products, you’ll want to investigate the RBC Canadian Preferred Share ETF (TSE:RPF.TO). It is a relatively new fund, debuting in late 2016. As a result, assets under management are small at just over $520M.
The ETF does contain a nice mix of preferred securities from Canadian issuers not seen in many of the other ETFs on this list, including Intact Financial, TC Energy, Cenovus Energy, Canadian Utilities, and Transalta. In total, it has about 161 holdings.
We’ll also note many of the fund’s top holdings are invested in variable-rate preferred shares, meaning if rates keep marching higher, this ETF will benefit. Of course, it stands to lose if the Bank of Canada starts cutting interest rates.
Fees come in around $5.80 per $1000 invested, and the fund currently has one of the higher yields on this list at 6.2%.
This fund isn’t actively managed, and it has been at the mercy of the fall in price when it comes to bonds and preferred shares. It has suffered the worst year in its history, falling over 18.5% in 2022. However, if rates settle or start going down, past performance likely means a stronger upside in price.
RBC isn’t known for its ETFs. This is likely why this is one of the list’s smallest funds and typically gets the least attention. But it’s a solid option for those who don’t want to venture out to fund operators like Horizon, Vanguard, or iShares.
TD Active Preferred Share ETF (TSE:TPRF.TO)
We included another big bank ETF with the TD Active Preferred Share ETF (TSE:TPRF.TO). The active nature of this fund has helped it immensely in terms of overall performance during the rising rate environment.
The fund lost 15.24% in 2022, one of the best performances from an ETF on this list, with most losing anywhere from 18-24%.
It doesn’t yield as much as the other funds, coming in at only 4.58%. But with its active nature, it should be able to drive yields higher as it continues to scoop up fresher preferred shares at larger yields.
It has a diversified portfolio of nearly 150 preferred shares, and most of the top holdings are much like you’d see in any other fund on this list. Enbridge, CIBC, TC Energy, BCE, and Manulife Financial are some of the most popular blue-chip Canadian stocks in the top 10.
This is the smallest ETF on this list, with assets under management of just over $225M. However, AUM is still sizable enough that I don’t think the fund is at risk of being closed down.
It does have some of the lowest fees compared to its peers, with a management expense ratio of just 0.45%. That works out to just $4.50 worth of management fees for every $1000 invested.
BMO US Preferred Share ETF (TSE:ZUP)
I decided to add a Canadian-traded ETF that owns US-preferred stocks to this list for those interested. Alternatively, you can own ZUP in USD by looking for ZUP.U at your brokerage.
An important disclaimer before we continue as well is that the income taxes and implications of owning US preferred shares are much different from owning those from a Canadian corporation.
Although we cannot speak to an individual’s tax situation, you must understand the implications of the dividend tax credit and withholding taxes on US dividends before buying.
BMO does well at introducing niche ETFs to the market. This fund is just that. The BMO US Preferred Share Index ETF (TSE:ZUP) seeks to replicate, to the extent possible, the performance of the Solactive US Preferred Share Select Index (NTR), net of expenses.
It has 144 holdings, containing preferred shares from companies like Qurate Retail, Banc of California, Global Net Lease, and Navient Corp. These are hardly household names but are generally good credit risks and offer attractive yields.
The ETF has a dividend yield of around 6.6% and a management expense ratio of 0.50%, meaning you’ll pay $5 per $1000 to own the fund.
With assets under management of only US$13M, the fund is quite small, especially considering it has been around since 2017.
iShares Canadian Financial Monthly Income ETF (TSE:FIE)
I felt it would be good to include this niche ETF on this list, considering it does have exposure to preferred shares. However, it is far from a pure-play preferred share ETF.
In fact, at the time of writing, only around 20% of the iShares Canadian Financial Monthly Income ETF (TSE:FIE) is preferred shares. It gets this exposure through another preferred share fund we’ve talked about on this list, the iShares Canadian Preferred Share ETF (CPD).
For the most part, this fund invests in common stocks, preferred stocks, and bonds of some of the largest financial institutions in the country. While the preferred share and bond portion makes up just under 30% of the overall portfolio, the Big 6 banks and Manulife Financial are the next largest holdings inside the fund.
The fund pays a massive dividend, one that, at the time of writing, is just under 7%. But it also has the highest management fee on this list at 0.85%, or $8.50 per $1000 invested. These niche-style ETFs, particularly ones that look to deliver outsized passive income to investors, typically carry higher management fees.
This is somewhat of a “bonus” ETF for this list, and although it contains preferred shares, it is far from a pure preferred share option.
What exactly is a preferred share?
To explain a preferred share, it is often easiest to show the differences between it and another common asset class you are likely familiar with, common shares.
Like a bond, preferred shares have a par value and can sometimes be called back by the company at that par value. Common stocks do not have this characteristic.
The second difference would be voting rights. As a preferred shareholder, you give up all voting rights you would receive holding common shares of the company.
The third notable difference would be that fixed-income investors are usually guaranteed a fixed dividend, while common shareholders are not.
The fourth and final difference we’ll go over is that preferred share prices are like bonds and other fixed-income securities in that their prices depend heavily on interest rates. Common stock prices, however, are strictly based on the supply and demand of the market.
The one shared characteristic between preferred and common shares over something like a bond is that they typically do not have a maturity date.
Who are preferred shares best for?
If you’re looking for high yields and better price stability, preferred shares might be for you. The vast majority of preferred share purchases and holders are institutional investors.
You don’t see many retail investors dabbling in preferred shares, but the creation of preferred share Canadian ETFs or “exchange-traded funds” has made it easier for us to do so.
Exchange-traded funds offer simple diversification across entire markets or are targeted towards certain industries within larger markets, such as ETFs that aim to replicate indexes, ETFs that focus on niche markets such as banking, agriculture and commodities, or Canadian infrastructure ETFs.
We can now seek a diverse portfolio of preferred shares here in Canada instead of selecting individual preferred stocks. This reduces our overall risk and gives us one-click exposure to many companies and yields. These funds can be bought and sold on a stock exchange the same as any other fund or equity.
Overall, there are many more preferred share ETFs in Canada, but these are some of the best
Many major fund producers like Vanguard, BMO, Horizons, CI Financial, and even many of the large banks here in Canada have their own preferred share ETFs.
Listing all of them would be redundant. Most of them have the same goals and often the same holdings. I’ve listed various ETFs to give you a taste of the different strategies and types of funds.
In a rising rate environment, we could expect more pressure on preferred shares, and there is a chance the selloff of these funds continues. But if we plan to hold them long-term, we can lower our overall interest rate risk with them.
It is also important to review the commission structure of the brokerage you use to see if any of these funds can be traded commission-free, as this could be a nice bonus.