Preferred shares are a part of the market that is rarely understood by investors. These shares have features of both equity and fixed-income investments, making them more complex.
Make sure you’re aware of all of the features, as well as factors that can affect preferred shares before you incorporate them into your portfolio. Incorporating individual preferred shares into a portfolio can be difficult, so an ETF is a good approach.
We’ll cover the iShares CPD ETF, and if it’s a good choice for including preferred shares in your portfolio.
Liquid and diversified packaged Canadian preferred shares
A sub-par Canadian preferred share ETF that has consistently underperformed its benchmark.
- Diversified Canadian Preferred Shares
- Liquid Solution
- Large Size
- Interest Rate Risk
- Poor Performance Net of Fees
CPD is a Canadian preferred share ETF that is offered through Blackrock’s iShares lineup. Launched on October 4, 2007, the ETF now has just over $1.26 billion in assets under management.
If you are looking to find the latest price, you can search for its ticker on the Toronto Stock Exchange – TSE:CPD.
Preferred shares are similar to both stocks and bonds. When compared to common stock, preferred shares typically have no voting rights.
Preferred shareholders are prioritized over common shareholders when it comes to dividend payments. They are also prioritized over common shareholders (but under bondholders) in the event of bankruptcy, or if assets need to be distributed to investors.
Preferred shares typically pay either a fixed dividend or one that is set in terms of a benchmark rate. These shares have the potential to appreciate or depreciate in value, but not usually to the extent of common stock.
CPD invests in a variety of preferred shares issued by Canadian companies. Currently, the ETF has 215 different holdings. Preferred shares fall in between common shares and bonds in a company’s corporate structure.
CPD looks to track the S&P/TSX Preferred Share Index.
The CPD ETF represents the broader Canadian market well. It is heavily overweight in financials, utilities, and energy:
Keep in mind that these overweighed sector exposures are what differentiates the Canadian market. Other markets, like the US, will have much higher exposures to sectors such as technology.
CPD’s MER is 0.50%, which is fairly high for a passive ETF. When compared to Canadian preferred shares mutual funds, CPD’s fee is much lower.
The CPD ETF offers a yield of 4.6% as of May 2022, which will be attractive for investors looking for a constant income stream. While the yield is fairly high, your total return will also depend on the market value of the underlying preferred shares.
Income is distributed to investors monthly, similar to fixed income funds.
Unfortunately, preferred shares are negatively impacted by both rising interest rates and poor issuing company performance. To add to this, CPD has been consistently underperforming its benchmark over a long period of time.
Because CPD looks to track its particular index, it is not looking to add value in any way. Although the ETF aim to return the index performance net of fees, the longer-term underperformance is quite significant.
CPD Top Holdings
As of May 11, 2022, the top ten holdings of CPD include:
The top holdings match the overall sector weights but can change over time.
Several other Canadian preferred shares ETFs exist in Canada as potential substitutes for CPD.
CPD vs RPF
RBC’s RPF ETF is an alternative with the added benefit of active management. Active management means that the portfolio manager is aiming to outperform the ETF’s benchmark, not just match it.
If you believe in the value of RBC’s portfolio management team, it could justify the slightly higher MER. RPF’s MER is currently 0.59%, and has $840.5 million in assets, making it a fairly large ETF.
RPF currently holds 177 positions, which is more concentrated than CPD, and has a yield of 4.87%.
RPF has done significantly better than CPD over time, but keep in mind that it has only been in inception since September of 2016.
Overall, RPF’s superior long-term performance justifies the slightly higher fees and makes it a better choice instead of CPD.
CPD vs NPRF
National Bank’s NPRF is another active Canadian preferred share ETF that competes with CPD. Similar to RPF above, the slightly higher fee could make sense if you believe in the manager’s ability to outperform.
NPRF has an MER of 0.57%. The size of NPRF is $174.2 million, making it smaller than CPD and RPF. NPRF currently holds 191 positions and has a yield of 3.99%. NPRF’s inception date is January 19, 2019.
In terms of performance, NPRF has underperformed in the short-term but outperformed by an incredible amount over a three-year period.
Between NPRF and RPF, the choice is debatable, but both are worth the additional fee when comparing performance to CPD.
CPD vs DCP
Desjardins’ DCP Canadian preferred shares ETF is a final alternative to consider. It is passively managed against the Solactive Canadian Rate Reset Preferred Share TR Index.
DCP has an MER of 0.53%, which is just barely higher than CPD’s. The main issue with DCP is its asset size – it only has $7.3 million in assets, making it an incredibly small ETF.
DCP holds 161 positions, making it the most concentrated ETF on this list. It is currently paying a 4.55% distribution yield and has an inception date of April 3, 2017.
As a passively managed ETF, DCP outperforms across almost all time frames, for an extra 0.03% in fees. Given its incredibly small size, however, we can’t recommend it as a viable substitute for CPD.
Is CPD a good investment?
Given our above analysis, CPD would not be a good investment vehicle for accessing Canadian preferred shares.
While it is one of the lowest-cost options in the Canadian space, the difference in performance between some of the active ETFs above is too large.
Since RBC’s RPF and National Bank’s NPRF are both better ETFs, we do not recommend CPD at this point.
Understanding when and how to include preferred shares is critical when building your portfolio.
In terms of risk, all of the ETFs above are considered medium risk. National Bank’s website outlines NPRF as being a low-medium risk investment.
Stocks are typically considered, at a minimum, medium risk with most brokerages in Canada. Most bonds and other fixed-income instruments range from low to medium.
Despite preferred shares being a hybrid of stocks and bonds, we recommend approaching portfolio construction through stocks and bonds.
Investment products such as alternatives would likely do a better job of diversifying your portfolio. With CPD’s 1.48% annualized return over a ten-year period, the case for preferred shares becomes very difficult to argue.
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Our Final Verdict
We don’t recommend buying the CPD ETF when so many better-performing alternatives exist in Canada.
While CPD is the cheapest Canadian preferred share ETF on our list, it makes sense to pay several basis points more in fees for one of its competitors. Keep in mind that past performance will not necessarily continue into the future.
If you must include Canadian preferred shares, we recommend RBC’s RPF or National Bank’s NPRF ETFs instead of iShares’ CPD for investors that:
- are looking for a high monthly income stream
- want to take on less risk than stocks, but more risk than fixed income
- add a layer of diversification to their portfolio
Overall, we recommend that medium-risk investors look to a mix of defensive stocks and bonds as a substitute for preferred shares.
If you are new to investing, make sure to take some time to properly determine your risk profile and asset allocation.