Q — Our adviser recently advised us to purchase Royal Bank Preferred ETF (TSX: RPF). Is this a good investment at this time? Would ZPR (BMO preferred ETF) be a better choice? The funds for this investment are coming from the sale of Inter Pipeline, which I am also not sure was the right thing to be doing at this time. — Carolyn T.
A — No, I would not have advised selling Inter Pipeline but what's done is done. You are now looking at two preferred share ETFs, presumably because you want less risk with good cash flow.
RPF is a brand-new exchange-traded fund, having been launched only in September. So we have very little history to go on. The fund holds 155 rate-reset preferreds, most of which are rated Pfd-2 or Pfd-3, meaning the default risk is low. The portfolio is heavily concentrated in two sectors, financials (56.4 per cent) and energy (23.7 per cent) and is entirely invested in Canada.
Distributions are made monthly, currently at a rate of $0.08 per unit. That's $0.96 per year, which equates to a yield of 4.6 per cent annually, based on a price of $20.82. Of course, there is no guarantee the fund will continue to pay at the same rate.
So far, the units have traded in a narrow range of $20.15 to $21.45. They are currently at about the mid-point of that range. The management fee is 0.53 per cent.
The BMO Laddered Preferred Share Index ETF (TSX: ZPR) has been around quite a bit longer, having been launched in November 2012. So we have four years of history to work with.
The fund tracks an index you probably never heard of, the Solactive Laddered Canadian Preferred Share Index. It includes Canadian preferred shares that meet size, liquidity, listing, and quality criteria. The index uses a five-year laddered structure, which means that one-fifth of the portfolio turns over every five years.
In terms of credit ratings, the portfolio is similar to that of the Royal Bank fund, with 98 per cent of the assets weighting Pfd-2 or Pfd-3. The sector asset weights are a little more diversified, with 40.4 per cent in financials and 24.5 per cent in oil and gas companies.
As with the Royal Bank fund, this ETF focuses on rate reset preferreds. These securities were hit badly when interest rates were falling and investors have paid the price. As of Nov. 30, the fund was showing an average annual loss of 4.7 per cent since inception, fuelled mainly by a drop of 20.2 per cent last year. It has done a little better in 2016 with a year-to-date gain of 1.7 per cent.
Distributions are made monthly and are currently $0.043 per unit ($0.516 per year). It's worth noting that BMO has reduced distributions twice since last December, when they were at $0.05 per unit. At the current rate (remember, no guarantees) the yield is 5.1 per cent based on a price of $10.21.
This fund has total assets of $1.4 billion. The maximum annual management fee is 0.45 per cent.
So which fund to choose? It's a toss-up. Both invest in the same type of securities, rate reset preferreds, and so are likely to show similar performance statistics over time. The BMO fund has a slightly lower management fee, which may translate into a marginal advantage over the years. It also has a higher yield at present, but keep in mind management has cut the distribution twice within 12 months. — G.P.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.
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