5 Best Preferred Shares ETFs in Canada for May 2024

Investors in search of steady income through their investment portfolios often go for preferred shares ETFs. 

Preferred shares ETFs are an odd asset class because they are not entirely bonds or equities but share similarities with both.

Preferred shares ETFs are considered fixed-income investments, but they are also susceptible to equity-market risk, which might worry some investors.

Hopefully, my guide on the best preferred shares ETFs in Canada can help you better understand the asset class and whether you should consider adding it to your investment strategy.

What is a Preferred Shares ETF?

Preferred shares ETFs are Exchange-Traded Funds that encapsulate collections of preferred shares. These stocks are a special type of stock that pays dividends but does not come with voting rights.

Preferred shares are essentially hybrid securities that pay dividends like equities. Canadian preferred shares are also eligible for a dividend tax credit. Investors can trade preferred shares ETFs on the stock market. These ETFs are not as volatile as equities on the stock market. Still, they are subject to the movement of the market.

Investors who select preferred shares ETFs often consider the asset class as a fixed-income asset. However, the fourth quarter of 2018 saw the S&P/TSX preferred share total return index lose 10%. This was proof that preferred shares ETFs are subject to equity-market risks.

Preferred shares are also similar to bonds because they are sensitive to interest rates and have several classes or types. It means when a company issues a class of preferred shares, they can have an end date, a fixed or floating distribution rate, and other features similar to bonds.

Essentially, preferred shares are an asset class between stocks and bonds. You can use them to tweak a portfolio to replace some of the equity or corporate bond portion potentially.

However, I would not recommend using them to substitute equities because preferred shares do not participate in the upside – a major no-go if you are an investor with a long-term investing horizon.

Top Preferred Shares ETFs in Canada

• BMO Laddered Preferred Share Index ETF (ZPR.TO)
• iShares S&P/TSX Canadian Preferred Share ETF (CPD.TO)
• Horizons Active Preferred Share ETF (HPR.TO)
• Invesco Canadian Preferred Share Index ETF (PPS.TO)
• RBC Canadian Preferred Share ETF (RPF.TO)

1. BMO Laddered Preferred Share Index ETF

The BMO Laddered Preferred Share Index ETF has been designed to replicate the performance of the Solactive Laddered Canadian Preferred Share Index, net of expenses.

The ETF is designed for investors looking to bolster the passive income in their portfolios. The Index uses a five-year laddered structure where annual buckets are equal-weighted while the securities within each bucket are market-capitalization-weighted.

The BMO Laddered Preferred Share Index ETF has several benefits that make it one of the best preferred shares ETFs in Canada. It is invested in a diversified portfolio of rate reset preferred shares.

The lower interest rate sensitivity compared to the full preferred shares market gives it more stability. Additionally, it is professionally managed by BMO Global Asset Management – an advantage over many other peers.

2. iShares S&P/TSX Canadian Preferred Share ETF 

The iShares S&P/TSX Canadian Preferred Share ETF seeks to replicate the performance of the S&P/TSX Preferred Share Index.

The preferred shares issued by a company have to meet its financing or capital requirements, including fixed-rate and floating preferred shares, cumulative and non-cumulative preferred shares, and preferred shares with a callable or conversion feature.

The preferred shares must have a market capitalization of more than $100 million as of the monthly rebalancing reference date over the last ten trading days to be eligible for the Index.

The iShares S&P/TSX Canadian Preferred Share ETF is the oldest ETF in the category, and its track record indicates the ups and downs of this asset class. Investors can use this ETF to gain exposure to a diversified portfolio of Canadian preferred shares. They can also use it to diversify sources of income beyond GICs and government bonds.

3. Horizons Active Preferred Share ETF

Horizons Active Preferred Share ETF has the investment objective of providing its investors with dividend income while preserving capital. It aims to achieve that goal by investing primarily in preferred shares of Canadian companies.

Horizons Active Preferred Share ETF may also invest in preferred shares of companies located in the US, and including other income-generating assets.

It may also invest in Canadian equity securities and ETFs that issue index participation units. The ETF seeks, to the extent possible, to hedge its non-Canadian dollar currency exposure to the Canadian dollar at all times.

It is an actively managed ETF that does not seek to replicate the performance of any underlying reference benchmark and is designed to track the performance of the Canadian preferred share market.

The ETF’s portfolio composition can drastically vary materially from that of the Index in both constituent issuers and weightings.

4. Invesco Canadian Preferred Share Index ETF

The Invesco Canadian Preferred Share Index ETF is an exchange-traded fund incorporated in Canada. The ETF seeks to replicate, to the extent possible, the performance of the NASDAQ Select Canadian Preferred Share Index, before fees and expenses. The ETF primarily invests in preferred shares issued in Canada.

The ETF is a variation of the indexing theme, and it is one of the six ETFs that invest primarily in Canadian preferred shares with at least a three-year history. Invesco Canadian Preferred Share Index ETF is the only one among them offering an above-average Morningstar rating for risk-adjusted historical returns.

It is a combination of the 100 highest-yielding and lowest-volatility dividend-paying preferred stocks in the stock market. The underlying NASDAQ Select Canadian Preferred Share Index is a modified market capitalization-weighted index.

Mainly consisting of financial institutions preferred shares and energy sector preferred stocks, it historically demonstrated a low correlation to investments in common equity and investment-grade fixed-income securities.

5. RBC Canadian Preferred Share ETF

The RBC Canadian Preferred Share ETF aims to provide investors with exposure to the performance of a diversified portfolio of primarily Canadian preferred stocks. Ideally, its portfolio includes Canadian preferred shares that will provide investors with regular income with long-term capital growth potential.

The RBC Canadian Preferred Share ETF primarily invests in an actively managed portfolio of rate reset preferred shares issued by Canadian companies trading on the TSX.

The ETF selects the preferred shares in its portfolio based on fundamental analysis, credit research, and interest rate sensitivity analysis.

The ETF may also hold preferred shares issued by Canadian companies that are not reset-preferred shares, fixed-income securities issued by Canadian companies or governments, dividend-paying common stock from Canadian issuers, and preferred shares from US issuers as well as other Canadian ETFs.

It can work well in the portfolio of investors who want to diversify their portfolio with preferred shares, require regular income, and can accept fluctuations in the value of their investments.

Tax Implications of Investing in Preferred Shares ETFs

Canadian preferred shares typically come with a dividend tax credit. This tax credit serves as a means of reducing the overall tax burden on the dividends received from preferred shares. Preferred shares ETFs can offer attractive after-tax yields, making them an appealing choice for income-focused investors.

Interest Rates and Preferred Shares ETFs

The performance of preferred shares ETFs is intricately tied to fluctuations in interest rates. Given their hybrid nature, preferred shares ETFs respond to changes in interest rates due to the bond-like characteristics inherent in these securities.

Preferred shares often feature fixed or floating distribution rates, rendering them sensitive to shifts in interest rates. In instances where interest rates experience an upswing, the value of fixed-rate preferred shares might decline, impacting the overall performance of preferred shares ETFs.

Highest Yield Canadian Preferred Share ETFs

The BMO Laddered Preferred Share Index ETF (ZPR.TO) and iShares S&P/TSX Canadian Preferred Share ETF (CPD.TO) are known for their competitive dividend yields. These yields represent the annual income generated from dividends relative to the ETF’s price. However, keep in mind that dividend yields can vary over time due to changes in market conditions and the composition of the ETF’s underlying assets.

How to Buy Preferred Shares ETFs in Canada

The cheapest way to buy ETFs is from discount brokers. My top choices in Canada are:

To learn more, check out my full breakdown of the best trading platforms in Canada.

Conclusion

If you are interested in preferred stocks, you can consider the best preferred shares ETFs in Canada. Choosing a preferred shares ETF in Canada means you do not need to worry about researching and maintaining various preferred stocks yourself. The ETFs manage it all for you based on their specific goals.

I can see why investors are attracted to preferred shares. The ETFs offer tax-efficient dividends and relatively low volatility during stable interest-rate environments.

Personally, I would prefer using ETFs over picking individual preferred shares if I was considering investing in preferred shares. I would go for either ZPR or CPD as my picks.