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HORIZONS’ PREFERRED-SHARE ETF OFFERS ACTIVE MANAGEMENT TWIST
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By Gordon Pape  | Monday, October 24, 2016


BUILDING WEALTH WITH GORDON PAPE
 

With bond yields near record lows, income investors have been hard-pressed to find low-risk securities that generate the cash flow they require. For example, the iShares Canadian Universe Bond Index ETF (TSX: XBB) is yielding just 2.75%, while the iShares Core S&P/TSX Cap Composite Index ETF (TSX: XIC) yields 2.9%. Meantime, the Horizons Active Preferred Share ETF (TSX: HPR) yields an attractive 4.5%. So why aren’t more people putting their money into preferreds?

Some are. But many yield-seeking investors are still licking their wounds from the hammering reset preferreds, which make up about 60% of the market, have experienced in recent years. They’re frightened, understandably, to throw more money at what they see as a sinking ship.

Reset preferreds are a relatively new phenomenon, and their brief history has not been good. These stocks pay a fixed return for a certain period, usually five years, after which the rate is reset using a formula that is tied to a key rate such as prime. They work best in a rising interest rate market. Unfortunately, rates have been falling almost from the day the first resets came out. The result has been losses of up to 40% on key issues. No wonder people are frightened.

Moreover, building a preferred share portfolio on your own is difficult and time-consuming. These shares are not well covered by analysts, and brokers rarely recommend them, except when they’re pushing a new issue. The overall market in Canada is small and difficult to analyze. As a result, most people look elsewhere.

However, the Horizons Active Preferred Share ETF (TSX: HPR) is a possible solution to the preferred share quandary. It gained 8.07% over the six months to the end of September and yields 4.5% at the current price. Here are the details. Prices are as of the close of trading on Oct. 19.

Horizons Active Preferred Share ETF
Type
: Exchange-traded fund
Trading symbol: TSX: HPR
Recent price: $8.47
Annual payout: $0.38
Yield: 4.5%
Risk rating: Higher risk
Website : www.horizonsetfs.com/ETF/HPR

The security: Most ETFs are passive securities. That means they closely track their target indexes, and the returns reflect what that market is doing. However, this ETF is actively managed, which means the team at Fiera Capital Corp., which is sub-advisor of the fund, decides on the composition of the portfolio. They invest mainly in Canadian securities, but the fund may also hold some U.S. stocks. Non-Canadian dollar exposure is hedged.

Why we like it : Active management means the administrators can minimize their positions in the riskier segments of the preferred share market, which is about 60% weighted to resets. As a result, while this fund has not been immune to losses, it has fared better than the more widely held iShares S&P/TSX Canadian Preferred Share Index ETF (TSX: CPD) in recent years. For example, this fund lost 12.67% in 2015 compared with 15.25% for the iShares entry. The one-year gain to Sept. 30 was 9.53% compared to 7.88% for the iShares ETF.

Assets: The Horizons fund has assets under management of almost $790 million. That compares to about $1.2 billion for the iShares fund.

Risks: The preferred share market has settled down since the start of this year and has been on an upward trend in recent months. However, these securities are highly interest-rate sensitive. A sustained upward movement in rates would have a negative effect on the price of this fund.

Distribution policy: The units currently pay $0.03237 per month (about $0.388 per year) to yield 4.5% at the recent price.

Tax considerations: Distributions are treated as a combination of return of capital and eligible dividends. The percentage of each will vary from year to year. In 2015, HPR investors received 87% of their payments as dividends, with the rest qualifying as return of capital.

Cost: You’ll pay a brokerage commission to buy or sell unless you have a fee-based account. The annual management fee is 0.55% plus applicable sales tax.

Who it’s for: This ETF is suitable for investors who are searching for yield and can handle the risk involved in today’s complex preferred share market.

How to buy: The units trade actively on the TSX. Any broker can fill your order.

Consult your financial advisor before making any investment decision.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletter, which are available through the Building Wealth website.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

Follow Gordon Pape’s latest updates on Twitter.

Notes and Disclaimer

© 2016 by The Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

BUILDING WEALTH WITH GORDON PAPE
 

 
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