# Preferred Shares ETF's



## Belguy (May 24, 2010)

While this topic may have been discussed elsewhere on this forum, I would like to ask if you believe that preferred shares ETF's currently have any place in a diversified portfolio. Also, should they only be in an unregistered portfolio is do they make any sense in a registered portfolio?

http://business.financialpost.com/2...-alternative-to-bonds-stocks/?__lsa=1404-143b

Thank you for any thoughts that you may have.


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## gibor365 (Apr 1, 2011)

Belguy said:


> While this topic may have been discussed elsewhere on this forum, I would like to ask if you believe that preferred shares ETF's currently have any place in a diversified portfolio. Also, should they only be in an unregistered portfolio is do they make any sense in a registered portfolio?


Why only unregistered? What does it matter? I have only registered accounts, preferred looks no too bad right now, I'm planning to buy XPF, ZPR or XTR (that has XPF withing it)


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## andrewf (Mar 1, 2010)

I'm not sure if there are any good pref ETFs. Some are too expensive, some are exposed to long duration prefs.

Keep in mind that pref share ETFs can have misleading yield figures, too, since many preferred shares trade at a premium to their call value. The companies that issued the shares often have the right to buy back the shares at a price lower than they trade at today, lowering the effective yield. The worst case yield scenario for the investor who buys the pref share (yield to worst) is lower than the coupon yield.

Caveat emptor...


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## andrewf (Mar 1, 2010)

gibor, why buy 3 funds? Isn't that 'diworsification'?

I don't doubt that me poo pooing these because the yield is misleading will not go over well with you. 

It's not surprising. Investors are reaching for yield....


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## Belguy (May 24, 2010)

I thought that preferreds belonged more in an unregistered account to take advantage of the dividend tax credits

On the other hand, maybe preferreds are not such a good idea after all as this article states:

http://www.cbsnews.com/8301-505123_162-57413922/why-you-should-avoid-preferred-stocks/

Do you invest in preferreds? Why or why not?


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## gibor365 (Apr 1, 2011)

andrew, it's very funny :biggrin::stupid: , but who told you that I gonna buy all 3 ETF ?! If I buy , I'll buy 1 of then.... buy 5 year GIC at ICICICIC , the interest is not misleading


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## andrewf (Mar 1, 2010)

Look at the individual holdings. Look at the yield to worst. A lot of them are only yielding 3ish%, not almost-5%.


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## gibor365 (Apr 1, 2011)

OK, you won...5 years GIC is the best


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## Belguy (May 24, 2010)

gibor said:


> OK, you won...5 years GIC is the best


Oh, geez, I wouldn't lock my money up in a 5 year GIC with the likely prospect of rising interest rates sooner rather than later although rising rates has been an unfulfilled prophecy for many, many months now.

Are you prepared to pays your money and takes your chances or might a HISA be a better choice?


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## andrewf (Mar 1, 2010)

Not necessarily. I'm just encouraging you to understand what the real expected total return is. Just drooling over portfolio/coupon yield numbers can get you into trouble.


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## andrewf (Mar 1, 2010)

Belguy said:


> Oh, geez, I wouldn't lock my money up in a 5 year GIC with the likely prospect of rising interest rates sooner rather than later although rising rates has been an unfulfilled prophecy for many, many months now.
> 
> Are you prepared to pays your money and takes your chances or might a HISA be a better choice?


What happens to pref shares when interest rates go up?


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## fatcat (Nov 11, 2009)

CPD is yielding about 4% after expenses
it has gone virtually sideway for the last 2.5 years
so i see it as a good choice in a slow growth environment where common stock is likely to be going nowhere (also sideways)
in a non-registered account you get the dividend tax credit and you are ahead of common stock holders in the case of bankruptcy
(though CPD has like over 160 different issues so default is not a big risk)

preferreds are correlated with equities so you are taking mainly equity risk
i think they are basically a good choice in a sideways, stagnant market but would only own a small portion basically as yet another form of diversification


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## Belguy (May 24, 2010)

I was thinking about a 5 per cent allocation to preferreds for diversification purposes but I think that I will scrap that idea.

It's just that I can't get comfortable with my allocation to bond funds at a time when so many are saying that this is not a good time to be in them and so I have been fishing for alternatives.

That alternative may end up being just a 40 per cent allocation to cash and a HISA which is pretty much dead money but it still provides some ballast should the equity markets enter rough seas and my 2008 experience has taught me the value of that.

In fact, because of my age, I may even move to a 50 per cent cash and fixed income target allocation and put it all in a HISA and then just sit back and watch it lose buying power to inflation.

Or, maybe I should just stick the whole wad under the mattress and be done with it.


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## gibor365 (Apr 1, 2011)

I just know that if somebody invested in XPF when it was issued Nov 2010, he would have better appreciation that XIU and almost twice more dividends....


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## Belguy (May 24, 2010)

gibor said:


> I just know that if somebody invested in XPF when it was issued Nov 2010, he would have better appreciation that XIU and almost twice more dividends....


Disclaimer: Past performance is no guarantee of future results.


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## gibor365 (Apr 1, 2011)

andrewf said:


> What happens to pref shares when interest rates go up?


 In case of XTR, preferred ETF can be going down, but it can be compensated by for example XDV.. also the biggest allocation for XTR in my portfolio will be 2-3%


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## fatcat (Nov 11, 2009)

they really are a good choice for people that are in taxable accounts and want yield and also to get a dividend tax credit
bonds kill you at tax time so high net-worth people can do better with preffereds than with bonds
they are really targeted towards the higher net-worth slice


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## andrewf (Mar 1, 2010)

Driving down the street with your eyes on the rear-view mirror.


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## gibor365 (Apr 1, 2011)

and what is good choice for people with non-taxable accounts?


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## Belguy (May 24, 2010)

I have often heard that more diversification often results in diworsification and that slicing and dicing your portfolio only makes it more difficult and expensive to manage with no guarantee of better results.

Again, it comes back to a portfolio of four or five of the lowest-fee, broadest-based ETF's, such as those offered by Vanguard, and then just let it be and don't go chasing after better returns.

'Couch Potato' investors beat the long term returns of most investors just by leaving their portfolios alone aside from rebalancing when required.

K.I.S.S.

You could do worse!!!

Of course, there is always another alternative: Buy, sell, buy, sell. Buy, buy, buy. Sell, sell, sell.


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## pacman (Sep 6, 2009)

I have a large % of my fixed allocation in preferred shares. I'm not a fan of the ETF's. I subscribe to James Hymas preferred share newsletter, and pick and choose from the monthly recommendations there. I have done very well over the last couple of years. I agree with other comments that you have to be very careful with the YTW yields if you are on the DIY system. I feel that the prefs are not affected by interest rates quite as much as bonds, which I have also held in the past (but sold most holdings recently).

pacman


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## gibor365 (Apr 1, 2011)

Belguy said:


> I have often heard that more diversification often results in diworsification and that slicing and dicing your portfolio only makes it more difficult and expensive to manage with no guarantee of better results.
> 
> Again, it comes back to a portfolio of four or five of the lowest-fee, broadest-based ETF's, such as those offered by Vanguard, and then just let it be and don't go chasing after better returns.
> 
> ...


Belguy, looks like you are trying more to convince yourself than somebody esle that ETF indexing is the best  
If you feel like this, go with it....
I also have some broad base ETF like VEA, VTI, PRF...but majority my holdings are blue-chip dividend paying stocks...now I'm accumulating , later will be living from dividends


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## Belguy (May 24, 2010)

Enjoy!! 

And now, it's bedtime for Bonzo. I need my rest because it looks like tomorrow is a shovelling day (eat your heart out Vancouverites!!).


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## fatcat (Nov 11, 2009)

Belguy said:


> I have often heard that more diversification often results in diworsification and that slicing and dicing your portfolio only makes it more difficult and expensive to manage with no guarantee of better results.
> 
> Again, it comes back to a portfolio of four or five of the lowest-fee, broadest-based ETF's, such as those offered by Vanguard, and then just let it be and don't go chasing after better returns.
> 
> ...


i think it a very good idea to have a broad range of assets that are as uncorrelated as possible like stocks, bonds, high-yield bonds, reits, preferreds, commodities, cash and so on ... how you get them is a matter of personal choice


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## Soils4Peace (Mar 14, 2010)

What diversification would preferreds have in a portfolio that already has stocks and bonds in it? Slice and dice only if it gets you lower overall risk or higher overall return! Vanilla stock and bond ETFs have much lower MER.


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## Belguy (May 24, 2010)

Investing in just four or five broad-based ETF's provides plenty of diversification as you will be invested in hundreds or perhaps thousands of stocks while holding just a handful or so investments.

How much more diversification can the average investor possibly need?

At least it provides much more diversification than just a portfolio of 15 or so Canadian dividend payers.


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## fatcat (Nov 11, 2009)

Belguy said:


> Investing in just four or five broad-based ETF's provides plenty of diversification as you will be invested in hundreds or perhaps thousands of stocks while holding just a handful or so investments.
> 
> How much more diversification can the average investor possibly need?
> 
> At least it provides much more diversification than just a portfolio of 15 or so Canadian dividend payers.


i am talking about diversification over asset classes ... you don't need to own hundreds of stocks or even dozens of stocks to have a well diversified portfolio ... you should own a range of assest that are uncorrelated

harry browne's permanent portfolio is an example ... he recommends assets that are uncorrelated so that you can cover as many scenarios as possible (inflation/deflation, expansion/contraction)


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## james4beach (Nov 15, 2012)

I don't own any preferred shares. I know they're getting popular again, but I'm pretty sure that's just yield-chasing behaviour (similar to the current love affair with junk bonds). Preferred shares are not simple investments, and there's lots of caveats. I wouldn't even dream of buying them other than in a ETF.

I don't buy them because they combine the worst features of stocks and bonds, without the best features of stocks (true upside) or bonds (fixed maturity and first claims to assets).

1. They have high correlation to stocks. If the stock market plunges, your preferreds will plunge just as badly.
2. As with bonds, you have interest rate sensitivity (rising rates = bad) plus poor liquidity

Why would I take an investment that combines the worst aspects of stocks & bonds, forfeits many of the best aspects of either, is complex and full of pitfalls ... and all that for maybe just 1% or 2% more yield than regular stocks & bonds?

I don't think it's worth it, not nearly enough risk premium for all that trouble.


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## james4beach (Nov 15, 2012)

fatcat said:


> i think it a very good idea to have a broad range of assets that are as uncorrelated as possible like stocks, bonds, high-yield bonds, reits, preferreds, commodities, cash and so on ...


I think this is a really big misconception of modern investing.

Pull up some charts from 2007-today and you'll see that pretty much all of those ARE highly correlated, in fact move in lock-step. Junk bonds and REITs move same as stocks. Preferred exposure doesn't add diversification. All of these are "high risk assets" and in the ZIRP world, they're all treated the same. Risk on - or - risk off.

The only exceptions (low correlation) are: cash, high rated bonds, and some commodities like gold.

So to create a truly diversified portfolio, just boil down all those correlations, and use something like:
a) cash (me: savings & GICs)
b) high grade bonds, like XSB or XBB (me: government bonds)
c) stock index of some kind, with dividends. Buy one stock index and you've bought them all
d) gold (me: CEF.A)

Mathematically speaking, that's a well diversified portfolio. This * is * what my portfolio looks like. It gets tempting over time to keep adding more things but I also have to keep reminding myself that most of those other things are just redundant and don't add any diversification.


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## fatcat (Nov 11, 2009)

james4beach said:


> I think this is a really big misconception of modern investing.
> 
> Pull up some charts from 2007-today and you'll see that pretty much all of those ARE highly correlated, in fact move in lock-step. Junk bonds and REITs move same as stocks. Preferred exposure doesn't add diversification. All of these are "high risk assets" and in the ZIRP world, they're all treated the same. Risk on - or - risk off.
> 
> ...


i wouldn't really argue with you in so far as since 2007 we are living in alice-in-wonderland-central-bank-world dominated by the intense fear of a black swan event so we swing from risk-on to risk-off

in normal times these asset classes all behave in their own idiosyncratic ways and while i agree that we all ned to pick our level of diversification, i tend to believe that if you can keep costs (important) to a reasonable level, you should try for as much diversification and non-correlation as you can since it might give you the edge in times of change

your example above of cash, bonds, stocks and gold is the harry browne permanent portfolio exactly so i assume you are familiar with his thinking

it is pretty hard to argue with something like MUTFRPFX


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## james4beach (Nov 15, 2012)

You're right this is a modern times phenomenon. I'd love to get back to the old days where different investments act differently, risk spreads widen so you're actually PAID to take weird risks, etc.

Maybe all this weirdness will end one day soon. That's what I keep hoping anyway. But we would need low interest rates to end and that seems unlikely to happen soon 

I didn't know about harry browne


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## Cal (Jun 17, 2009)

james4beach said:


> I don't buy them because they combine the worst features of stocks and bonds, without the best features of stocks (true upside) or bonds (fixed maturity and first claims to assets).


I haven't bought any as I would prefer to get dividend increases from the common shares. Maybe would consider if I were closer to retirement, but at my age, many years of dividend increases are too valuable to consider ETF's at this point.


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## gibor365 (Apr 1, 2011)

I checked PFF chart (iShares S&P U.S. Preferred Stock Index Fund) and found that from Jan 08 to Jan 09 it dropped more than 60%, much more than US Utilities XLU or VPU (that dropped 40%), so obviously preferred too volatile


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