# BMO Preferred Share ZPR vs GIC/HISA



## scorpion_ca (Nov 3, 2014)

I was thinking to buy ZPR (around 10K) in my cash account. I am getting around 2% from GIC/HISA whereas ZPR is paying around 4.41%. The total net asset for ZPR is around $1.1B. That means, lot of smart people already invested billion dollar there. What's your suggestion?


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## dime (Jun 20, 2013)

I'm also interested to see what others will say on this. I'm holding some preferred ETS.

I could be wrong on this but one concern I've got with preferred ETFs is that I'm pretty sure they're going to drop when rates rise. By how much, I'm not sure. At least with bond funds you get a sense of the duration risk. 

For example in the US, the equivalent duration of a preferred fund is 4.5 for PGX. In theory this could mean you'd see it drop 4.5% for a 1% rise in rates. 

https://www.invesco.com/portal/site/us/financial-professional/etfs/product-detail?productId=pgx 

The other factor is the credit risk rating. The junk debt funds have dropped quite a bit in the past while over fears that oil companies will have difficulty paying back their high yield debt with the drop in oil price.


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## Moneytoo (Mar 26, 2014)

dime said:


> I could be wrong on this but one concern I've got with preferred ETFs is that I'm pretty sure they're going to drop when rates rise. By how much, I'm not sure. At least with bond funds you get a sense of the duration risk.


That's what I thought, too, but if you look at ZPR chart, it dropped further when Canadian rates were lowered recently (was going down since November - right after I sold it, but my husband kept his) There was a thread about ZPR's illogical behavior on RFD forum, and one guy (who buys individual preferreds) said that you shouldn't be buying ETF if you don't understand its underlying holdings - and that was it.

I spent a lot of time in the summer trying to understand different preferential shares, yet still don't understand what's up (or rather down) with ZPR. So I just bought PFF (US preferreds ETF) in my RRSP and plan to buy XPF (a mix of US and CA preferreds ETF) in my TFSA when I add money to it in April - both yield more than ZPR (and way more than HISA, GICs and bonds ETFs) And if they drop when US interest rates rise - will just keep adding every year when I add money to my accounts. 

Personally, I like REITs and preferreds, and don't plan buying GICs or bonds until they start yielding 3.5-4%. And when I suggested HISA's to my husband, we did the math - and decided they're not worth the hustle


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## james4beach (Nov 15, 2012)

Preferred shares and GICs are different asset classes.

Preferreds are a type of equity, and come with equity risk.
GICs are fixed income.

They're just different beasts. Besides why bother with preferreds, wouldn't you rather buy the plain stock index instead? What is the advantage of preferreds?


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## james4beach (Nov 15, 2012)

scorpion_ca said:


> The total net asset for ZPR is around $1.1B. That means, lot of smart people already invested billion dollar there.


I interpret it a different way. It tells me that a lot of people have been sucked into yield-chasing, and flocked to ZPR in the desperate search for higher yields.

Look at the performance of ZPR. It's horrible! Comparing it with ZCN (TSX Composite), ZPR underperforms in every single time period column. Why is this appealing exactly?

Undoubtedly it's the yield that attracts people. But it's only total return that matters. I think this is a perfect illustration of how retail investors get deceived by The Income Illusion (recommend you read this article)

Do you realize that ZPR has a far worse return than GICs? The annualized return since inception is -2.5%. The one year return is -3.7%.

I'm making more money in GICs! Hell, I'm making more money in cash.


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## kitbuilder (Aug 15, 2013)

Canadian preferred shares are a tough breed, mainly due to the sheer number of different options available to the companies who issue them. Naturally, the company is going to exercise the option that favours themselves and not the investors holding the preferred shares. What follows is a gross oversimplification, but basically sums up how I see it after personally investing in preferred shares for the past 5 years. Consider the two major types: perpetual and rate-reset.

If interest rates go up, then:
- perpetual shares typically lose value because they pay the old, lower yield and are long to mature
- rate-reset shares typically gain/maintain value because they are going to reset at a higher yield as long as the company decides to not redeem them

If interest rates to down, then:
- perpetual shares typically gain/maintain value because they pay the old, higher yield as long as the company decides not to redeem them
- rate-reset shares typically lose value because they are going to reset at a lower yield

In both cases where the shares lose value, it's in the company's interest not to redeem the shares because they get to pay a lower yield. In both cases where the shares gain value, it's usually in the company's best interest to redeem them as soon as it's economical to replace them with lower yielding shares, which effectively caps any investor gains. So there's an aspect of heads I win/tails you lose.

Before you invest in preferred shares, or an ETF of preferred shares, I strongly urge you to read and understand the excellent _Guide to Preferred Shares_ from ScotiaMcLeod:

http://www.investingforme.com/pdfs/preferred-share-prospectus/2014%20Preferred%20Share%20Guide.pdf

Now, about your specific question on preferred shares/ZPR: If this is a long term holding and you do not have the contribution room in your RRSP or TFSA for all of your fixed income allocation, or if you are investing for income instead of growth, then holding Canadian preferred shares as a component of your fixed income in your non-registered account is a reasonable step. In addition to yield, the other main benefit of Canadian preferred shares over GIC/HISA in a non-registered account is the dividend tax credit. Unless retired, I wouldn't hold preferred shares in an RRSP or TFSA because the tax credit no longer applies, plus there's no potential for growth. I'd rather hold growth or interest-bearing assets in RRSP and TFSA.

However, note that *ZPR consists entirely of rate-reset preferred shares*:

http://etfs.bmo.com/controller/image?image=auto_fund_profile_pdf_92496

For this reason, with the recent surprise drop in the BOC rate, ZPR is performing poorly. There are a number of preferred share issues in this ETF that are going to reset at a lower rate, and that's being priced in. ZPR emerged fairly recently and seems to be marketed towards the growing number of investors who believe that interest rates are going to start rising. However, this runs contrary to my investment style where I believe that nobody can predict interest rate movement, and so I've never seriously considered holding ZPR. I prefer to hold CPD instead in order to also hold perpetual shares and have greater diversification.

http://www.blackrock.com/ca/individual/en/literature/fact-sheet/cpd-ishares-s-p-tsx-canadian-preferred-share-index-etf-fund-fact-sheet-en-ca.pdf

CPD consists of 20% of our entire portfolio, which is 45/55 fixed income/equity. The other fixed income components are 12.5% VAB (RRSP), 10% ZRR (RRSP), and 2.5% ZHY (TFSA).


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## Moneytoo (Mar 26, 2014)

james4beach said:


> Do you realize that ZPR has a far worse return than GICs? The annualized return since inception is -2.5%. The one year return is -3.7%.
> 
> I'm making more money in GICs! Hell, I'm making more money in cash.


Reading "The Single Best Investment" by Lowell Miller (somebody posted a link to a free pdf here recently - thank you! ), finally a book that makes sense!  A long quote if I may:

«The nature of the economic environment leads to one inevitable conclusion: you cannot hide in fixed-income investments. So-called “safe” investments arenʼt safe at all when you realize that stagnant capital will not keep ahead of inflation. On the contrary, since we know that inflation exists, and since we know that bonds do not rise along with inflation, we know that bonds are actually riskier in the long term than investments which can increase in value.

Except for short-term parking of funds and to preserve fixed amounts that you may need in five years or less, all investors, whether they are retirees or corporate pension plans or churches or foundations, must say “goodbye to bonds,” to T-bills, to bank C.D.s, to GICʼs, to money market funds. For fixed-income investments are also fixed-principal investments, and the real*value of your principal—as well as the real value of your “fixed” income— will diminish over time, like a vigorous man becoming frail and weak in old age.

...

*The right understanding of risk is an assessment of how often and how deeply the value of your investments will fluctuate, and whether you will be paid enough to accept that bouncing, compared to how much you get paid to accept the fluctuations in other investments.* Most important, what are the qualities of the fluctuations and the qualities of the investments that are fluctuating, which affect how you feel about the fluctuations, which affect how well you are able to tolerate the fluctuations?»

By the way, I consider preferred shares ETFs "other income", and plan to hold them in addition to equities, not instead of.


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## scorpion_ca (Nov 3, 2014)

The reason I wanted to buy ZPR is dividend yield 4.41% that is higher than GIC/HISA. I would buy some VCN in cash account too. But VCN doesn't provide much dividend compare to ZPR. I understand equity/fixed income but need to increase my equity allocation.



james4beach said:


> Preferred shares and GICs are different asset classes.
> 
> Preferreds are a type of equity, and come with equity risk.
> GICs are fixed income.
> ...


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## scorpion_ca (Nov 3, 2014)

Thanks everyone for your reply. Tomorrow I will read the above posts thoroughly. 

BTW - I am not experienced in investing...trying to improve my knowledge.


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## james4beach (Nov 15, 2012)

If you're not experienced in investing, I recommend avoiding preferred shares. These are a complex and somewhat exotic asset. They are non-standard and not many people understand them. Even the best investors in the world like Buffett restrict themselves only to investments they understand.



> The right understanding of risk is an assessment of how often and how deeply the value of your investments will fluctuate, and *whether you will be paid enough to accept that bouncing*, compared to how much you get paid to accept the fluctuations in other investments


How exactly is -2.5% since inception possibly enough reward to justify investing in ZPR? Do you think the potential forward returns are so high that ZPR will surge back and make up for its dismal performance since inception?

Accepting risk for *reward* I understand. One may buy the TSX index and take the risk of declines because it's also exhibited strong performance like +8% annual returns for a while. But why on earth accept the same equity risk for ZPR, which has exhibited nothing but negative returns? This thing is a *chronic money-loser even after its dividends*. Why do you have so much confidence -- in something you don't understand the mechanics of -- that you are so hopefully for strong returns going forward?


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## Moneytoo (Mar 26, 2014)

james4beach said:


> If you're not experienced in investing, I recommend avoiding preferred shares.


And Garth Turner always recommends using them:

"As bond yields have fallen and prices swollen, investors have also been nibbling away at preferred shares – those hybrid beauties sitting between stocks and bonds. Way more stable than common stock, plus they pay you in tax-reduced dividends instead of interest (as bonds do). Buy them in the big, blue chip companies like the banks or insurers and hang on for a great yield. For example, the fund XPF has traded in a narrow range over the past year and kicks out a dividend yield of 4.96%.

...

Those who are serious about building liquid net worth (the best kind) are well served by having a portfolio weighted to *40% safe stuff (half a variety of bonds, half preferreds) and 60% growth* (about 8% REITs, the rest in equity – a third of it Canadian, the rest US and international, divided between large and smaller cap companies)."

(c) http://www.greaterfool.ca/2015/02/03/surprise-9



james4beach said:


> How exactly is -2.5% since inception possibly enough reward to justify investing in ZPR? Do you think the potential forward returns are so high that ZPR will surge back and make up for its dismal performance since inception?


"Since inception" - you mean, in a bit more than 2 years? Look at CBO chart (a staple in many portfolios) since inception  But anyways, as I said before, I sold ZPR in my RRSP, but my husband kept his. He started with a 1000 shares 10 months ago, has DRIPed 24 shares since then - and keeps DRIPing 3 shares a month at lower prices. So yes, there's hope that when interest rates go up - so will his initial and accumulated ZPR shares. But ask me again in a few years (in a rising rates environment )



james4beach said:


> Accepting risk for reward I understand. One may buy the TSX index and take the risk of declines because it's also exhibited strong performance like +8% annual returns for a while. But why on earth accept the same equity risk for ZPR, which has exhibited nothing but negative returns? This thing is a chronic money-loser even after its dividends. Why do you have so much confidence -- in something you don't understand the mechanics of -- that you are so hopefully for strong returns going forward?


We have only 6% of our combined portfolio allocated to US and CA preferred shares, 21% to Canadian equities and 27% to US equities. I strongly believe in diversification, and preferred shares make more sense to me than 5% in gold ETF that I tried to sell last month while we were still making 10%, but my husband decided to wait till 15% - and now it's down again...


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## GOB (Feb 15, 2011)

Preferreds are far safer than equities from a risk perspective. They're meant to provide a steady distribution, which they do. They may rise and fall with rates but if holding for long term cash flow I wouldn't worry about it.


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## fatcat (Nov 11, 2009)

Moneytoo said:


> And Garth Turner always recommends using them:
> 
> "As bond yields have fallen and prices swollen, investors have also been nibbling away at preferred shares – those hybrid beauties sitting between stocks and bonds. Way more stable than common stock, plus they pay you in tax-reduced dividends instead of interest (as bonds do). Buy them in the big, blue chip companies like the banks or insurers and hang on for a great yield. For example, the fund XPF has traded in a narrow range over the past year and kicks out a dividend yield of 4.96%.


agree, but mainly for high net income people who can benefit from the advantaged taxation ... owning individual issues of blue chips is fine as a small percentage of your portfolio to kick up the yield

they react to the market like equities but come ahead of equities in the event of liquidation

i see no problem in allocating 5% of your portfolio to kick up yield


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## AltaRed (Jun 8, 2009)

It is completely unfair to be critical of ZPR given its short history and given it is full of resets that have been hurt by decreasing GoC 5 year bond yields when such yield were expected to go up since 2014. Prefs need to looked at over long periods of time of 10-20 years. By design, ZPR is meant to represent a ladder of 5 year resets that mitigates the effect of interest rate changes versus straight perpetuals that have no maturity dates and have no rate changes. Straight perpetuals behave more like long bonds but with tax advantaged income.

I have a series of 5 year resets resetting between mid-2015 to late 2020. The ones being hurt now are the ones resetting between now and mid-2017. The rest are holding up fine because the market is anticipating 5 year bond yields will be back to historical levels by 2018. OTOH, now is a super time to be picking up early resets circa $18 range. I recently bought TRP.PR.A that just reset at bargain prices. It will yield me excellent returns forever.

Added: I have about 10% of my portfolio in individual prefs. I will likely increase my exposure to 15% over the course of 2015 as I pick off bargains that are resetting this year. Readers shoukd note I am in withdrawal stage so these prefs give me a confident income stream as part of my pseudo-fixed income in my taxable portfolio. I have no more room in my RRSP for interest bearing investments.


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## james4beach (Nov 15, 2012)

Thanks for the thoughts and yes I agree one needs longer periods to do a proper analysis. But please, everyone, don't lose sight of total return. The goal is to have a strong total return, no matter what the dividends paid out are.

I'm not convinced that preferred shares are either "safer" or exhibit better long term returns than stocks. In the US, they have not. In the 7 year existence of PFF, it has _under_-performed S&P 500 in total return. It also proved to be *riskier* than the S&P 500 by crashing -60% when the broad market only crashed -50%.

How exactly were those preferreds "safer" than the stock market? Or is it different in Canada


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## scorpion_ca (Nov 3, 2014)

After the reading the above posts, I have decided to buy more VCN instead of ZPR...I will review ZPR again in future.

Oil is around $53, lot of layoffs, very high household debt....however,TSX is still going up almost everyday....don't understand..........any explanation?


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## scorpion_ca (Nov 3, 2014)

Could you please share the link?



Moneytoo said:


> Reading "The Single Best Investment" by Lowell Miller (somebody posted a link to a free pdf here recently - thank you! ), finally a book that makes sense!


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## Moneytoo (Mar 26, 2014)

scorpion_ca said:


> Could you please share the link?


Here you go: http://www.mhinvest.com/files/pdf/SBI_Single_Best_Investment_Miller.pdf


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## Moneytoo (Mar 26, 2014)

james4beach said:


> In the 7 year existence of PFF, it has _under_-performed S&P 500 in total return. It also proved to be *riskier* than the S&P 500 by crashing -60% when the broad market only crashed -50%.


PFF is ~80% financials, so I think for a fair comparison you need to look at XLF-N for the same time period


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## AltaRed (Jun 8, 2009)

Agree PFF is a poor comparator, given the financial crisis. That said, it is an example per James where prefs were whacked as well as the commons but that was an extraordinary event. Prefs spread amongst sectors would fare much better. As to those who say the S&P500 performed better in total return, well, of course it should. 

Canadian prefs are more like pseudo-fixed income, better than bonds in taxable accounts (with the dividend tax credit) which is how I use them. I would never put prefs in a registered account, and I would never own US prefs due to zero dividend tax credit.


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## Moneytoo (Mar 26, 2014)

AltaRed said:


> I would never put prefs in a registered account, and I would never own US prefs due to zero dividend tax credit.


Not even if you only had registered accounts with lots of room and no plans to open a non-registered one in the near future? My RRSP and TFSA are all equities (individual stocks and ETFs), no bonds or GICs, so pref shares ETFs were supposed to be the safest holdings


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## gardner (Feb 13, 2014)

I hold ZPR in a non-registered account. It is riskier than bonds -- I hold XQB in my registered accounts --but it makes up for some of that risk by being tax-efficient.

If you are in a situation where you have room in your registered account (I don't) and you want to add a fixed-income asset, then I would recommend bonds before preferreds: bond fund is tax efficient in registered accounts, has vaguely comparable yield and much lower volatility and risk.


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## fatcat (Nov 11, 2009)

james4beach said:


> How exactly were those preferreds "safer" than the stock market? Or is it different in Canada


there may be a confusion in terms ... they are "safer" in so far as they come ahead of common stock in bankruptcy but they are _not_ bonds and as you say they move like equities when the sh## hits the fan

they are appropriate for higher tax bracket people in small allotments since unlike bonds they are eligible for the divvy tax credit ... they add a little pop to your overall yield


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## CPA Candidate (Dec 15, 2013)

From a theoretical standpoint, preferred shares offer the risk of equity, without the potential upside of a common share, and the return of a bond plus 1-2%.

Compare the returns of bank preferred shares to bank common shares over the past 10 years. You'd would have been much better off in the common shares.

When you look at the preferred shares of quality companies, do they really offer any more security? If you bought RY preferred shares, are you really any safer than the common share holder with respect to dividends? In theory yes, but in reality, highly unlikely. All you did is give up all of your upside to remove risk that was extremely remote.


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## AltaRed (Jun 8, 2009)

Moneytoo said:


> Not even if you only had registered accounts with lots of room and no plans to open a non-registered one in the near future? My RRSP and TFSA are all equities (individual stocks and ETFs), no bonds or GICs, so pref shares ETFs were supposed to be the safest holdings


Well, sure if I had unlimited room (which I do not). I should have qualified that to my situation. The point was that CDN prefs are better in non-registered accounts than bonds due to the dividend tax credit. My average yield is in the order of 4-4.5% in fixed resets and 5+% in straight perpetuals. A lot more than I can get on an AT basis than on GICs or bonds. As I mentioned, prefs fit a niche in a portfolio, especially larger ones, and as pseudo-fixed income during retirement.

I know people argue that one can get a 4% dividend stream on common equities and that is possible within a limited set of equities in certain sectors. But the dividends are not cumulative and can go down as well. It is a case of diversifying I to a pseudo-different asset class just as one would do with REITs.


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## Moneytoo (Mar 26, 2014)

AltaRed said:


> Well, sure if I had unlimited room (which I do not). I should have qualified that to my situation.
> ...
> It is a case of diversifying I to a pseudo-different asset class just as one would do with REITs.


Thank you for clarifying it!  I intend to use PFF's dividends in RRSP to add to USD ETFs that don't pay much dividends themselves (like VTI and IEMG) Also, want to add a Canadian REIT that pays USD dividends for the same reason - something safe(r) that can produce income to buy something riskier. Wish I knew that POT pays USD dividends before I bought it in my CAD-only TFSA last summer, but oh well - you live, you learn


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## james4beach (Nov 15, 2012)

fatcat said:


> there may be a confusion in terms ... they are "safer" in so far as they come ahead of common stock in bankruptcy but they are _not_ bonds and as you say they move like equities when the sh## hits the fan


Good point, they are safer than common stock in that you get closer to the front of the line in liquidation of a bankrupt company. But as far as fluctuations in market price, there's no intrinsic safety offered by preferreds with respect to price declines


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## scorpion_ca (Nov 3, 2014)

Thanks for the link.



Moneytoo said:


> Here you go: http://www.mhinvest.com/files/pdf/SBI_Single_Best_Investment_Miller.pdf


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## scorpion_ca (Nov 3, 2014)

After reading http://www.moneysense.ca/invest/etfs/the-best-etfs-for-2015, I have bought 1,000 ZPR @ 12.98 today. I maxed out my registered accounts and tired of buying GIC/HISA at 1.05%-1.9% in non-registered account. I don't have any plan to sell it in the near future.


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## Namael (Jul 14, 2013)

Does anyone know of an ETF like ZPR (5 year rate resets only) that hold US based preferred shares? So pretty much a US version of ZPR?


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## gibor365 (Apr 1, 2011)

Namael said:


> Does anyone know of an ETF like ZPR (5 year rate resets only) that hold US based preferred shares? So pretty much a US version of ZPR?


PGX and PFF , both have yield around 6%


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## Namael (Jul 14, 2013)

gibor said:


> PGX and PFF , both have yield around 6%


Gibor, do they hold only rate reset or perpetual? I couldn't see in the prospectus whether they only hold rate reset or not?


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## scorpion_ca (Nov 3, 2014)

The yield of bond and preferred share has increased significantly for the last couple of months whereas BOC cut the prime interest rate last year and might cut it again. Could anyone please explain the relationship between lower interest rate and higher yield? Thanks!


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## tojo (Apr 20, 2009)

scorpion_ca said:


> The yield of bond and preferred share has increased significantly for the last couple of months whereas BOC cut the prime interest rate last year and might cut it again. Could anyone please explain the relationship between lower interest rate and higher yield? Thanks!


Scorpion, over at Financial Wisdom Forum there is a very good thread regarding preferreds. A similar question was asked, and a good response was provided in the following comments by "like_to_retire":

http://www.financialwisdomforum.org/forum/viewtopic.php?f=33&t=113976&start=825#p568533


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## Flash (Nov 25, 2014)

No clue how these preferred share like ZPR work, but can they sustain the yield for years to come if the economy stays low?


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## FI40 (Apr 6, 2015)

I'd like to resurrect this thread. I'm looking at preferreds as the 40% fixed income part of my asset allocation does not fully fit into my registered accounts, so I'm looking at unregistered fixed income options. I've got a lot of short term corporate bonds in registered, and a GIC in the unregistered as of now.

Here are my thoughts, I welcome any comments:

The fixed income side of my portfolio currently loses value if rates were to increase. I'm not sure about the equity side - probably not a huge effect in the short run.
Rate reset preferreds offer a sort of hedge to interest rate increases - they should do well if/when rates increase.
I'm really trying to ignore things like past returns and yield here and look at safety of expected total return. I see these as being less volatile than common shares, but a lot more volatile than bonds. In terms of return, in between equity and bonds, but tax advantaged so significantly better than bonds in a taxable account. However, the key thing is that they do well when rates go up so that means they're pretty uncorrelated with the rest of the portfolio and should be an effective diversifier.
I'd be adding these to my permanent asset allocation so that it would change to 5-10% prefs, 30-35% other bonds, 60% equities (canada/us/international), so the holding period would be forever.
I'd be using ZPR, because I don't care to invest in individual preferreds myself, and it's the only ETF (I think) that has all rate-reset which is the type I'd want due to the rate sensitivity characteristics. So the MER (around 0.5%) is a big knock against it compared to the rest of the funds I have, but it seems like it still could be the best option.


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## doctrine (Sep 30, 2011)

I like preferreds for exactly the reason you state, the rate-resets will rise if rates rise, which can offset bond exposure, especially long duration, higher yielding bonds. I use XPF because it's more diversified with US exposure. In my model registered portfolio, I use about 30% fixed income of which 5% is XPF.


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## james4beach (Nov 15, 2012)

Flash said:


> No clue how these preferred share like ZPR work, but can they sustain the yield for years to come if the economy stays low?


The yield isn't the issue. The question is total return!

ZPR annual return since inception 4 years ago is -5.7%
CPD annual return since inception 9+ years ago is 0.12%

Both of these have been worse investments than cash, so far.


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## doctrine (Sep 30, 2011)

Yes, but the question is also total future return. The risk reward for preferred shares at 50% of par value is very interesting. They have significant upside exposure to higher interest rates, but also upside to simply being bought out, as you can see with RON-A. Also, there are several new preferred share issues with rate resets *and* minimum yields, which have been fantastic (see TRP Series 13). There is huge potential with pair trades in this space as well as mentioned above. They can be an extremely cheap hedge against higher interest rates that could pay out a minimum yield several times that of corporate debt, far beyond historic interest rate premium for the securities.


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## mordko (Jan 23, 2016)

Ben Graham said preferred are a bad investment a less they are at least 30 percent under par.


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## james4beach (Nov 15, 2012)

These questions sound too complex and exotic to me. So how about on an ETF like ZPR and CPD which is how most people will invest in these? What is the par value of the portfolio, and how far under par are we? What caveats are associated with these claims that preferreds are good X% under par?

Is my half assed knowledge of preferreds and a couple articles enough to be making decisions on these?

And more importantly, is a fixed income investor -- who is investing for stability -- supposed to be dealing with stuff like this?


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## tojo (Apr 20, 2009)

doctrine said:


> Yes, but the question is also total future return. The risk reward for preferred shares at 50% of par value is very interesting. They have significant upside exposure to higher interest rates, but also upside to simply being bought out, as you can see with RON-A. Also, there are several new preferred share issues with rate resets *and* minimum yields, which have been fantastic (see TRP Series 13). There is huge potential with pair trades in this space as well as mentioned above. They can be an extremely cheap hedge against higher interest rates that could pay out a minimum yield several times that of corporate debt, far beyond historic interest rate premium for the securities.


I agree with you 100% on this. I bought a huge tranche of rate-resets of varying credit quality in late 2015 and early 2016 and they have been doing incredible for me. 27.1% IRR so far for 2016. They were priced as if rates were going negative so investors sold them off like the plague. Like you said, its all about relative risk. I would never buy a rate reset at par, or event the new minimum yield ones. But at 32-50 cents on the dollar, the risk/reward is heavily skewed in my favour. I'm getting capital gains from stabilizing 5 year GOC and narrowing credit spreads. Add to that the huge dividend. Because this is a niche area of investing, its more profitable to play individual shares than the ETF itself (e.g. ZPR). I can attest to that since my initial foray in preferred shares back in 2007 (13.3% IRR). Prefs provide a huge chunk of my passive income.


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## james4beach (Nov 15, 2012)

tojo, why don't you take your portfolio over to Blackrock and BMO and try to take over from their ETF managers? You're clearly doing much better than them. There are billions of dollars invested in their preferred ETFs, but you are able to get much higher returns than them.


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## tojo (Apr 20, 2009)

james4beach said:


> tojo, why don't you take your portfolio over to Blackrock and BMO and try to take over from their ETF managers? You're clearly doing much better than them. There are billions of dollars invested in their preferred ETFs, but you are able to get much higher returns than them.


Well therein lies the rub James. There is absolutely no way I can replicate this success on a large scale. My portfolio is minuscule compared to what these guys handle on a daily basis. These prefs trade very thinly, and it would be impossible to be as nimble in the market working with a multi-million or billion dollar fund. If I were to liquidate my entire pref port, it would take days simply because of illiquidity. I can't imagine how long it would take trading at very large volumes.


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## Brin68 (Aug 25, 2016)

Preferreds make up 30% of my portfolio which is all fixed income. I used to invest in ETF based on preferreds but was burnt a few times so now I only invest in individual issues. Portfolio is quite safe but I invest mostly in a certain class of preferreds that I can get my capital back . I do agree with what Tojo is doing trying to make capital gain while the preferred market stabilises.


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## scorpion_ca (Nov 3, 2014)

Is there anyone can explain why the ZPR is dropping for the last couple of days? My understanding was that the price of ZPR should be higher during the interest rate rising period. What am I missing? Thanks.


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## james4beach (Nov 15, 2012)

Wow, yes ZPR is tanking. My understanding is that preferreds correlate with general equities and are within the "equity" risk category (or equity asset allocation), so stocks and preferreds tend to tank together. This can be seen historically when you chart preferred share ETFs against the TSX and it seems to be the case right now as well.


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## robfordlives (Sep 18, 2014)

james4beach said:


> Wow, yes ZPR is tanking. My understanding is that preferreds correlate with general equities and are within the "equity" risk category (or equity asset allocation), so stocks and preferreds tend to tank together. This can be seen historically when you chart preferred share ETFs against the TSX and it seems to be the case right now as well.


But it only seems to participate in that behaviour on some days. When markets were tanking earlier in the month ZPR was either up or slightly down. I believe this may have some correlation to TLT (10 year treasury ETF in the US) as rate has gone from the 3.25% that spooked the market to nearly 3% (and hence why something like VAB is up lately). I own some as well and likely going to sell it all as I don't understand this as much as I thought. Unfortunately I'm out of room in my non taxable accounts and hence why I looked to Pref shares to round out my fixed income. 

I looked at it's top 10 holdings and seems to mainly be rate resets which is what I would have expected. I guess I'll park it in cash or send my money to Hymas to manage


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## fireseeker (Jul 24, 2017)

scorpion_ca said:


> Is there anyone can explain why the ZPR is dropping for the last couple of days? My understanding was that the price of ZPR should be higher during the interest rate rising period. What am I missing? Thanks.


Scorpion, James Hymas's essential Prefblog addresses this topic:

http://prefblog.com/?p=37445#comment-194598


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## scorpion_ca (Nov 3, 2014)

Thanks fireseeker.


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## john.cray (Dec 7, 2016)

The decline in preferred shares continues with full speed. If I understand the recent posts in preblog this is sort of unjustified. http://prefblog.com/?p=37566 from yesterday for example mentions:


> Volume was up today, with 29 issues trading 10,000+ shares – which still qualifies it as a ‘below average’ volume day. Like Assiduous Reader malcolmm, I have a hard time taking this seriously – I believe that retail has heard that the economy’s rushing down a well-oiled track:


ZPR is -2.49% as I write this.
I added to my position recently, thinking of doing it again as part of keeping the allocation right.

What are you doing?


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## john.cray (Dec 7, 2016)

Deleted double post


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## james4beach (Nov 15, 2012)

john.cray said:


> The decline in preferred shares continues with full speed.


Well they're equities, and are expected to be weak when equities are weak. They don't work as fixed income in asset allocation though and that isn't new. Dividend stocks aren't fixed income either.

Seem OK for one's equity exposure though, just a different sector/style.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Well they're equities, .......


Reset type preferreds pay a fixed income for 5 years. 

Perpetual type preferreds pay a fixed income forever (perpetually).

If not fixed income, then what?

James Hymas (a highly regarded preferred share expert) certainly considers them fixed income.

ltr


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## AltaRed (Jun 8, 2009)

I call them pseudo-fixed income and put them in Other as an Asset Class in Quicken. They generally behave like bonds but are 'influenced' considerably by their common equity siblings, as they were in the big equity bear of 08-09. 

I include them in fixed income when talking about my equity/FI asset allocations.


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## james4beach (Nov 15, 2012)

I think based on correlation alone they have to be considered equity. I've posted these graphs before, just make a chart of preferreds versus the TSX and they act almost identically. Local lows and local highs coincide, up and down phases align, turnaround points are the same. When the two charts are that similar I think you have to lump them together as the pricing action "speaks" louder than the theoretical story of what they are or what they do.

At least for ZPR and CPD.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I think based on correlation alone they have to be considered equity. I've posted these graphs before, just make a chart of preferreds versus the TSX and they act almost identically..


Sure, and off-times bonds and other securities correlate with the equity indexes. Matters not. Fixed income is just that - fixed income. A bond's value goes up and down for many different reasons, but we take solace in the fact that the cash it throws off is fixed and we have a guarantee that this situation will remain over its term. So we call it fixed income. Tell me how a preferred share is any different than that?

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> Sure, and off-times bonds and other securities correlate with the equity indexes. Matters not. Fixed income is just that - fixed income. A bond's value goes up and down for many different reasons, but we take solace in the fact that the cash it throws off is fixed and we have a guarantee that this situation will remain over its term. So we call it fixed income. Tell me how a preferred share is any different than that?


When you chart bonds, they act nothing like equities. Try charting over for example a 2 or 3 year period, and try flipping between XIU, XBB, ZPR. The bonds look nothing at all like stocks, whereas ZPR looks much closer to stocks.

Fundamentally, preferred shares come with equity risk and carry equity risk premiums. Sure they throw off cash, but they still carry equity risk. Bonds don't have that, they have guaranteed returns only have the default risk. They're a different beast and charting against equities reflects that... they do not act similarly.


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## like_to_retire (Oct 9, 2016)

OK, we'll just agree to disagree.

I tend to think when something pays an income that is fixed, I like to call it fixed income.

Equities that pay an income (dividend), it's only fixed for the quarter it's paid. Then they have every right to stop paying it, reduce it or increase it. Not so with bonds, GIC's and Preferred shares. There's a contract to continue to pay the income, and that income is fixed. So we call it fixed income. 

The share price of a bond, GIC, preferred share rides up and down for many different reasons. Matters not - it has nothing to do with the income thay pay - that happens to be fixed. So we call it fixed income.

Anyway, I leave you to your belief and won't argue more on this.

ltr


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## AltaRed (Jun 8, 2009)

like_to_retire said:


> OK, we'll just agree to disagree.


+1 I don't much care for theoretical definitions myself. It is the how and why I hold the asset, and for what purpose that I hold the asset, and for that reason, my fixed resets and perpetuals fall essentially into my FI asset class. They are my backstop to my bonds and GICs if the markets go to hell for a long enough time that I am depleting my bonds and GICs. Call it my reserve gas tank for when the primary one goes dry.


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## agent99 (Sep 11, 2013)

james4beach said:


> When you chart bonds, they act nothing like equities. Try charting over for example a 2 or 3 year period, and try flipping between XIU, XBB, ZPR. The bonds look nothing at all like stocks, whereas ZPR looks much closer to stocks.


Makes no sense to compare unrelated equity index with bond and pfd funds. . You should compare the share price of a single name with it's perpetual pfd and perhaps with same company's corporate bonds. There will still be some correlation, but somehow I suspect the bond and pfd charts will have lower extremes. 

LTR is right. If an investment pays a steady stream of income and promises to pay back at least in part sometime in future, it is fixed income to me.


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## robfordlives (Sep 18, 2014)

What are others doing with their ZPR? I don't have the time or inclination to buy a Pref on my own hence why I own ZPR. I am OK with it dropping as yields have been declining steadily in the last 3-4 weeks so makes sense BUT these did not steadily rise in the year prior to that as rates hurtled upwards (only slight upward movement). I think I am ditching all of my ZPR and giving my money to Hymas as I'm out of room in my registered accounts


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## fireseeker (Jul 24, 2017)

If you qualify for Hymas, that's a great option. Given you are talking about non-reg accounts, you should check for turnover. 
I trimmed some ZPR a month ago but am mostly holding. It's actually moving to appealing levels.
My guess is that retail pref holders are still feeling scarred by 2015-16 experience. So the combination of sinking rates and sinking equity markets has them pitching prefs overboard without further thought. If both trends continue, prefs may well keep heading to Davy Jones's locker.
That's where the bottom feeders are.


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## AltaRed (Jun 8, 2009)

Could certainly be retail investors who are bailing. This is a niche asset class subject to lemming mentality.


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## james4beach (Nov 15, 2012)

agent99 said:


> Makes no sense to compare unrelated equity index with bond and pfd funds. . You should compare the share price of a single name with it's perpetual pfd and perhaps with same company's corporate bonds.


It makes sense when thinking about portfolio diversification and overall portfolio behaviour. For the people who may have added preferred shares as a way to achieve fixed income diversification, my point is that preferreds (at least ZPR/CPD) do not achieve this. They move like the stock market which isn't surprising, since they're equities.

Typically, investors hold both equity and fixed income to diversify. To achieve diversification, you need two or more assets which act differently. However, if you have two things that move the same way, you haven't diversified... you've just concentrated your portfolio in one thing. In that scenario, everything goes up together or goes down together -- not a diversified portfolio.

I'm just talking about a mathematical reality here. ZPR and CPD correlate with the TSX Composite. Whether or not it should is a different matter... but it _does_ correlate. And because it does, whichever way the stock market moves, it appears -- justified or not -- these preferred ETFs will also move.

5 year chart of ZPR against TSX: http://schrts.co/FcaxpY
1 year chart of ZPR against TSX: http://schrts.co/zgGPNe

I'm looking at the alignment of the up/down phases, and where it reverses direction. The issue isn't the different levels or extremes (that's just a matter of scale), but about the direction of movement. The 1 year chart shows the same thing pretty clearly, I think.

Two assets that move like this are not offering diversification. I realize this may not matter to people, and all they may care about is the income stream.


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## Jimmy (May 19, 2017)

The correlation is about .29 from 2012 -2018. There is a +ve correlation but it is not really strong.

Plug in xiu.to,zpr.to

https://www.portfoliovisualizer.com/asset-correlations


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## james4beach (Nov 15, 2012)

Jimmy said:


> The correlation is about .29 from 2012 -2018. There is a +ve correlation but it is not really strong.
> 
> Plug in xiu.to,zpr.to
> 
> https://www.portfoliovisualizer.com/asset-correlations


With the correlation calculator, the default setting is daily movements which doesn't make sense here. Widen it out to monthly returns and you'll see correlation of 0.44 between XIU, ZPR and higher 0.49 between XIU, CPD which has more many years more history and is a better measure.

That's quite strong; enough to call them highly related. For perspective, see how (according to that tool) other pairings measure up on the same monthly basis. And I'll sort these:

XIU, XSB = -0.20 ... known distinct asset class
XIU, XBB = -0.08 ... known distinct asset class
XIU, MNT = 0.03 ... known distinct asset class
*XIU, ZPR = 0.44
XIU, CPD = 0.49
*XIU, XAW = 0.53 ... world stocks, these are absolutely same asset class

I think this helps calibrate what that tool is showing us. If XAW, global stocks, have 0.53 correlation then the 0.49 for CPD is awfully close. Seems quite definitive to me; these are the same asset class.


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## agent99 (Sep 11, 2013)

James,
What you don't seem to be considering, is the risk level. Equities have higher risk than pfds which have higher risk than bonds. We choose to call the latter two along with cash our fixed income - the lower risk allocation in our portfolio that pays out fixed amounts of cash flow. We don't buy pfds or bonds to trade. Just to get a return on our initial investment. So how the markets price them doesn't really matter.


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## james4beach (Nov 15, 2012)

agent99 said:


> James,
> What you don't seem to be considering, is the risk level. Equities have higher risk than pfds which have higher risk than bonds. We choose to call the latter two along with cash our fixed income - the lower risk allocation in our portfolio that pays out fixed amounts of cash flow. We don't buy pfds or bonds to trade. Just to get a return on our initial investment. So how the markets price them doesn't really matter.


Fair enough, and I see your point. I was just speaking to the movement of the prices, and that's all the correlation refers to. If one is not concerned about the $ balance of their portfolio then it's a whole different line of reasoning.


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## Jimmy (May 19, 2017)

They are a separate class really. Correlation XIU to XSP is .76 in comparison. They have FI qualities w the fixed income dividend and have no 'ownership' of the company. Equity prices are also based on the company's earnings and the market. PS change due to the systemic general supply and demand of the market to a little degree so there is some correlation but only from that aspect. ie not so much for the other non systemic factors.

Looking at them, they are about mid way between XSP and XBB for correlation, about what you would expect.


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## gardner (Feb 13, 2014)

robfordlives said:


> What are others doing with their ZPR?


I will likely sell it and take the loss. My ACB is over 13 and there's little chance of coming back from that.


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## scorpion_ca (Nov 3, 2014)

I will keep continue to DRIP it. Hopefully the price of ZPR may be little higher in 20 years.


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## scorpion_ca (Nov 3, 2014)

What's happening with the ZPR lately? My understanding is that the interest rate would be higher once the economy is doing good. Why is it dropping when the economy is doing good? Any thoughts?


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## Jimmy (May 19, 2017)

scorpion_ca said:


> What's happening with the ZPR lately? My understanding is that the interest rate would be higher once the economy is doing good. Why is it dropping when the economy is doing good? Any thoughts?


The market and economy are really moving sideways now. They are forecasting lower growth of as low as ~ 1.2% for 2019. The BOC is keeping rates at 1.75% for now. Might be another yr before a rate hike. The drop in PS made little sense other than people panicking and selling a relatively illiquid asset worried about another drop like in 2016. Which makes no sense as dividends will still be resetting higher not lower as the 5yr was as low as .58% in 2016.

I think they are a good deal now w yields as high as ~6%.


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## like_to_retire (Oct 9, 2016)

scorpion_ca said:


> What's happening with the ZPR lately? My understanding is that the interest rate would be higher once the economy is doing good. Why is it dropping when the economy is doing good? Any thoughts?


Preferred shares are sensitive to interest rates and the weak understanding many purchasers of these shares possess (present company excluded of course). 

ltr


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## robfordlives (Sep 18, 2014)

I have a massive loss in ZPR now. I would like to flip out of this and purchase a 3-4 prefs directly to take advantage of tax loss. Any suggestions?


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## like_to_retire (Oct 9, 2016)

robfordlives said:


> I have a massive loss in ZPR now. I would like to flip out of this and purchase a 3-4 prefs directly to take advantage of tax loss. Any suggestions?


If share price is important to you (as you've indicated), then you'd have to be able to make a prediction on future interest rates depending on the type of preferred shares you bought.

ltr


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## scorpion_ca (Nov 3, 2014)

Jimmy said:


> I think they are a good deal now w yields as high as ~6%.


Yeah, I bought 200 ZPR at $9.69 today. I hope it would go below $9 that I can buy more...


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## scorpion_ca (Nov 3, 2014)

robfordlives said:


> I have a massive loss in ZPR now. I would like to flip out of this and purchase a 3-4 prefs directly to take advantage of tax loss. Any suggestions?


Would you care to share your ACB of ZPR?


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## AltaRed (Jun 8, 2009)

The GoC 5 yr bond rate is what drives fixed reset preferred share prices. As mentioned by others, future inflation and GDP growth is now assumed to be anemic. Hence current GoC5 interest rate. 

Prefs are a difficult animal to understand and market time. A lot of us got burned about 3 years ago assuming interest rates would rise.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> The GoC 5 yr bond rate is what drives fixed reset preferred share prices. As mentioned by others, future inflation and GDP growth is now assumed to be anemic. Hence current GoC5 interest rate.
> 
> Prefs are a difficult animal to understand and market time. A lot of us got burned about 3 years ago assuming interest rates would rise.


Yep, that's for sure. About a year ago I posted about my CMF farewell to preferred shares. Present allocation = zero. 

I had been buying and selling them for 12 years at that time and had just gotten rid of my last one. I had been dialing that portion of my fixed income to zero after deciding that preferred shares over the long run hadn't done a lot for me compared to other types of fixed income. I was lucky that in May that year, it was their peak and then nosedived since then. I had put a lot of work into understanding prefs over that last decade. The problem is you're trading with a group of nincompoops who don't understand them. You may as well trade with school children. 

Anyway, over 11.5 years I had made a geometric average annual Total Return of 2.7%. Embarrassing, and it ain't because I don't understand them - I do, and they're quite complicated. During my dialing down over time of preferred shares in my portfolio to zero, while trying to get the best prices, I created a spreadsheet that would track if my transactions were profitable in the future. I decided that preferred shares were risky, and as such I would assign the asset allocation I gave to to preferred shares would now go to blue chip dividend stocks instead, and I would alter my asset allocation of preferred shares (fixed income) to blue chip dividend stocks (equity). 

It was an easy spreadsheet to create and it updates every time I check my portfolio. So if I sold $30K of a FTS preferred share and put that into a FTS common, it was pretty easy to see where I stood as time past. I won't get specific, but safe to say it's worked out.

If you care about total return, preferred shares probably aren't for you, (unless of course you are interested in trading them or you have a crystal ball regarding interest rates).

If you want something that pays a decent, tax efficient dividend, in a non-registered account, and share price isn't important, then straight perpetual preferred shares are probably fine (caveat for a few years with respect to NVCC - will no longer qualify as Tier 1 Capital post 2022). Suitable for the retired. Anything else - not so much. They all seem to favour the issuer.

To buy preferred shares, you need full understanding of credit ratings, redemption, retraction, high spread rate resets, low spread rate resets, straight perpetuals, fixed floaters, floating rates, split shares, retractables, non-viability contingent capital (NVCC) subordinated debt, interest rate risk, call risk, liquidity risk, underlying benchmark yield, etc, etc.

Preferred shares are a bugger for the novice. Divert your attention elsewhere.

ltr


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## AltaRed (Jun 8, 2009)

I have 2 fixed resets left and one perpetual, all discount lifecos on the premise NVCC compliance will come along some day. Just kind of setting that aside as a 'noise' wedge in the portfolio and let it ride. They may come in handy if global trade goes off the rails and we have another 2008/2009 recession, as a source of funds to support my 'wild' living habits.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> They may come in handy if global trade goes off the rails and we have another 2008/2009 recession, as a source of funds to support my 'wild' living habits.


Well, that 2008 situation was about the only thing that allowed me to claim a small gain over almost 12 years of playing prefs, as many of us backed up a truck in 2008 and it worked out. It may have been a once in a lifetime opportunity. I should have used a bigger truck.

As it is, with all the new reset types and NVCC, it's just not something that I want to put any money into. I wish everyone that does all the best.

ltr


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## john.cray (Dec 7, 2016)

james4beach said:


> Well they're equities, and are expected to be weak when equities are weak. They don't work as fixed income in asset allocation though and that isn't new. Dividend stocks aren't fixed income either.
> 
> Seem OK for one's equity exposure though, just a different sector/style.


I know this is a bit of a sensitive topic, but wanted to point two things out.
The question if preferred shares should be counted against the fixed income part of a portfolio (along with bonds) or with your equity (they are shares after all) has been brought up multiple times.
The predominant thinking in this forum is that they should not be counted as part of the fixed income. "Other" at best 

In today's post of Garth Turner's blog (https://www.greaterfool.ca/2019/07/29/debts-embrace/) one can see this:


> These days about 20% of a balanced portfolio (40% fixed income and 60% growth assets) should be in bonds. That includes a little hunk of federal debt, with the rest in provincial and corporate bonds. Add 4-5% in a cash equivalent (we use an ultra-short-term bond fund for a higher return and no risk) plus about 15% in preferreds, and that makes up the 40%. The overall yield on that is around 4.6%, with the prefs delivering a dividend tax credit. Sweet.


What do you think of that ?


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## scorpion_ca (Nov 3, 2014)

I read couple of years ago in the MoneySense magazine that Preferred Shares should be part of the fixed income and I calculate my assets allocation based on this.


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## AltaRed (Jun 8, 2009)

I classify them as Other, but when citing an equity/FI asset allocation, I include them in Fixed. Thus, of my 15% of investable portfolio in fixed income, I have about equal amounts in Corp Bonds/Corp Prefs/GICs/HISA


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## john.cray (Dec 7, 2016)

Another one that has caught my attention previously is the very first paragraph http://www.prefletter.com



> Preferred shares, paying Canadian Eligible Dividends, are an excellent choice for investors seeking fixed income in a taxable account ...


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## agent99 (Sep 11, 2013)

john.cray said:


> Another one that has caught my attention previously is the very first paragraph http://www.prefletter.com


There are quite a number of different types of preferred shares. Some are more like fixed income than others. A perpetual from a "safe" company that pays 5% forever might be as good as a corporate bond from same company, with advantage of dividend instead of interest income. But rate resets (or funds that hold them) seem to me more like equity with risk of losses in both capital and income.


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## AltaRed (Jun 8, 2009)

Fixed resets are more like a 5 year GIC as long as they are left to run. It changes rate every 5 years but 30 years later, it can be less volatile than a straight perpetual. Think of them in the same timeline. The fixed reset has more volatility in yield but less in capital value.

Example: a 5 year fixed reset will have greater capital value in 30 years than a straight perpetual if interest rates creep up slowly to 10% over that time. The issuer will never call that straight perpetual.


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## Jimmy (May 19, 2017)

It seems PS are one of the few areas where there is any value left. They were punished earlier this year and are at rock bottom prices. I think they have all the worst scenarios ( rate cuts ) already priced in. They are near their lows from 2016 when the GOC5yr was .5% .


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## AltaRed (Jun 8, 2009)

I agree it is crazy and bizarre.


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## agent99 (Sep 11, 2013)

AltaRed said:


> Fixed resets are more like a 5 year GIC as long as they are left to run. It changes rate every 5 years but 30 years later, it can be less volatile than a straight perpetual. Think of them in the same timeline. The fixed reset has more volatility in yield but less in capital value.
> 
> Example: a 5 year fixed reset will have greater capital value in 30 years than a straight perpetual IF interest rates creep up slowly to 10% over that time. The issuer will never call that straight perpetual.


I changed that to a big IF  

Take a retiree, say 70yrs old with $100k to invest. They want to generate some relatively secure retirement dividend income from their taxable account. If they can find a perpetual that yields say 5%, they will have a created $5k pa in additional retirement income at relatively low risk. If interest rates go up, sure the capital value will drop, but if investing for the income, that should not really matter. It is a sort of buy and forget rather that resets where capital value and income can go up and down like a yoyo.

By the way, I have just two perpetuals with not much invested. One small reset and ZPR (which was a mistake!). Most FI is in RRIFs and in corporates and recently some GICs.


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## john.cray (Dec 7, 2016)

agent99 said:


> One small reset and ZPR (which was a mistake!).


Why was ZPR a mistake ?


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## scorpion_ca (Nov 3, 2014)

john.cray said:


> Why was ZPR a mistake ?


I guess that the value of ZPR dropped a lot in the last couple of years.


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## agent99 (Sep 11, 2013)

john.cray said:


> Why was ZPR a mistake ?


This comparison with TSX might explain:
https://documentcloud.adobe.com/link/track?uri=urn:aaid:scds:US:c94bd512-beca-4731-8bb1-d4407ab1b435


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## Brin68 (Aug 25, 2016)

If you want prefs which are more related to fixed income you should look at split preferreds or retractable preferreds. ZPR is composed of rate reset preferreds which can be very interest rate sensitive. ie sbc.pr.a ( split preferred) has gone from $10.16 to 10.41 in a year while ZPR has gone from $11.7 to 9.8. With potential rate cuts coming ZPR could have another leg down but it does offer some good value here. Bottom line don't confuse how different prefs will react to different situations.


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## james4beach (Nov 15, 2012)

I'll be totally honest with you guys, I've been reading comments on these forums for years about preferreds of various kinds and I still can't wrap my head around them. I have absolutely no intuition for fixed resets vs splits vs retractables, and what it all means, interest rate sensitivity.

This is why I haven't touched them. I just don't understand them and the more I read about them, the more complex it seems to become. On the other hand I feel I have a very good grasp of regular GICs and even bond funds, how they work and the returns they provide. Maybe it's just a matter of learning something well and getting used to it, but I'm sticking with GICs and bond ETFs.


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## agent99 (Sep 11, 2013)

Brin68 said:


> If you want prefs which are more related to fixed income you should look at split preferreds or retractable preferreds.


I haven't seen much in the way of retractables (or at least ones I would want to buy), but I do own a lot of split pfds. They are of course not really preferred shares, but do offer attractive fixed income like returns. 

For James' benefit - A split is a bit like you and I going 50-50 on buying some shares in say Royal Bank. I agree to let you keep all the dividend income while I will get any capital gains. Your 1/2 of the shares are called preferreds and my 1/2 capital shares. Every 5 years we re-evaluate and decide if we want to renew our partnership. You get about double the yield that you would if you owned the shares outright. 5 or 6% is common. Better than those GICs and bonds and relatively safe. Main risk is manager-related.


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## doctrine (Sep 30, 2011)

Floating rate preferred and fixed rate preferred effectively move in opposite directions to interest rates. If you want to bet on interest rates rising, those floating rate indexes are going to give you great exposure. It is also a way to hedge some of that interest rate risk if you own either fixed rate preferred or even mid/long term bonds. For the super smart money, there is even an absolute return trade there if you play the risk profiles correctly.


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