Wednesday marks the first day of trading for another Global X ETF, as the company introduced a fund offering exposure to a basket of preferred stocks from Canadian issuers that trade on the Toronto Stock Exchange. The Global X Canada Preferred ETF (CNPF) seeks to replicate the Solactive Canada Preferred Index, a benchmark that includes nearly 60 different preferred stock issues from companies operating in various sectors of the Canadian economy. Financials are the biggest allocation within the portfolio, making up nearly 75% of assets. Energy firms (10%), telecom companies (6%) and consumer discretionary companies (5%) make up the remainder of the exposure.
Preferred Stock Appeal
Preferred stock is a unique asset class, exhibiting characteristics of both equities and fixed income. Preferred stock has been a popular source of financing for banks for decades, and has been popular with investors because of the ability to generate stable cash flows while maintaining some equity participation as well.
Preferred stock generally carries no voting rights, entitling holders to dividends (often at fixed rates) that are subordinate to debt payments but senior to dividends paid on common stock. Because preferred stock is often convertible to common stock at a predetermined ratio, some upside potential in maintained; if the common stock of the issuer surges, holders of preferred stock can participate to some extent.
Preferred stock ETFs sank during the last financial crisis, as investors worried that firms would be unable to make the payments on these securities (and perhaps even the payments on the more senior debt). But preferred stock surged during the subsequent recovery, with some ETFs focusing on this asset class appreciating by nearly 200% in the year after markets finally bottomed out.
Interest in preferred stock has surged in recent months, thanks in part to the prolonged stretch of record low interest rates in the U.S. As yields on Treasurys and other fixed income securities have been depressed, investors have begun to look elsewhere to beef up their current returns. The 30-day SEC yield on the iShares S&P U.S. Preferred Stock Index Fund (PFF) is north of 6%, and that fund has a 12-month yield of close to 7.3%.
CNPF is the first U.S.-listed ETF to offer exposure to Canadian preferred stocks, joining a number of existing funds that focus on the U.S. preferred stock market. In addition to PFF, which has nearly $8 billion in assets, PowerShares also offers two preferred stock funds: The Financial Preferred Portfolio (PGF) and Preferred Portfolio (PGX). Those two funds have aggregate assets in excess of $3 billion, while the SPDR Wells Fargo Preferred Stock ETF (PSK) has about $100 million. Through the first four months of the year, more than $1.2 billion flowed into the four U.S. preferred stock ETFs, highlighting the growing interest in this asset class as a tool to enhance current yields and diversify exposure into this “hybrid” asset class.
All of the existing preferred stock ETFs are concentrated in securities of U.S. issuers, making CNPF an intriguing option for those seeking geographic diversification within this asset class. Many Canadian financial institutions maintained strong balance sheets and fiscal health throughout the financial crisis, enhancing their appeal to investors concerned about potential default (generally, preferred shareholders are paid out after debt in the event of a liquidation).
Moreover, Canada generally is on stronger financial footing than the U.S., home to a shrinking budget deficit and strong economic growth related in part to rising commodity prices. “CNPF provides a relatively efficient way for investors to reap the benefits of this hybrid asset class as well as receive international exposure via the Canadian issuers traded on the Toronto Stock Exchange,” said Bruno del Ama, chief executive officer of Global X Funds. “We are pleased to expand our global offering to income generating asset classes.”
There are multiple ETFs listed in Canada offering exposure to the country’s preferred stock market; the Claymore S&P/TSX CDN Preferred Share Trust has more than $600 million in AUM, and the actively-managed Horizons AlphaPro Preferred Share ETF (HPR) is another options for accessing this asset class. iShares filed earlier this year for an international preferred stock ETF that would include a heavy tilt towards Canadian securities, along with issuers from Japan, New Zealand, and the U.K.
Disclosure: No positions at time of writing.
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