The Best Preferred Share ETF in Canada (2023)

Dividend-hungry investors in Canada should consider adding a preferred share ETF to their portfolio. Individual preferred shares are attractive, but they’re difficult to understand for most DIY investors. Let’s discover Canada’s most popular preferred share ETFs and understand why ETFs are the best vehicle for investing in preferred shares in Canada.

Understanding Preferred Shares in Canada

Preferred shares – sometimes called preferred stock – are a unique and underutilized asset class. Especially in today’s economy, preferred shares deserve a second look from any investor looking to earn monthly income from their portfolio.

What distinguishes preferred shares is their higher-than-average dividend yield compared to their non-preferred counterparts. Take the Royal Bank of Canada (RBC) as an example. Shares of its common stock currently pay a quarterly dividend of 4%. Meanwhile, preferred shares investors can invest in RBC’s series of perpetual 5.25% preferred shares and earn a significantly higher dividend. Perhaps best of all, dividends are paid monthly instead of quarterly – a common attribute among preferred shares.

Now, this high-yielding asset class is not without tradeoffs. For one, preferred shares investors do not have the same rights and privileges as holders of common stock; they have no vote in the company’s affairs and have no stake in its future profits. Instead, preferred shares are more like a debt instrument with rights to a company’s assets above that of common shareholders and below creditors and bondholders.

How to Invest in Canadian Preferred Shares

For a DIY investor, finding the best preferred shares in Canada can be a difficult exercise. For example, RBC’s perpetual 5.25% preferred shares mentioned above are just about as simple as it gets. Meanwhile, there are rate-reset preferred shares, callable preferred shares, cumulative preferred shares, convertible preferred shares, and various other types of preferred shares that businesses are interested in issuing to investors. RBC alone has ten different series of preferred shares available today, all with varying yields and terms. Unlike when purchasing common stock, it can be difficult to decipher which preferred share is right for you.

That’s where a preferred share ETF can really help. Instead of understanding the minutia of each type of preferred share, investors can purchase an ETF that holds hundreds. Investing in the best preferred share ETF in Canada can be a great decision for investors looking to earn significant dividend income from their portfolio.

How Preferred Shares Are Taxed in Canada

For Canadians investing in taxable accounts, preferred shares and preferred share ETFs are attractive for their tax efficiency. In contrast with bonds and bond ETFs – whose interest payments are taxed as ordinary income – preferred shares pay dividends. As you may already know, dividends are taxed much more favourably in Canada. High dividend yields combined with a reduced chance for price appreciation makes preferred share ETFs ideal for investors looking to add income to their taxable accounts. Also, given that these ETFs hold Canadian preferred shares, your income is not subject to foreign withholding taxes.

Canada’s Best Preferred Share ETFs

Unlike more popular asset classes, there are only a few well-known preferred share ETFs in Canada. Each of these funds attempts to invest in a diversified portfolio of preferred shares issued by some of Canada’s largest public companies. Let’s dive in, and I’ll share my pick for the best preferred share ETF in Canada.

CPD ETF Review

A strong contender for the best preferred share ETF in Canada is iShares S&P/TSX Canadian Preferred Shares Index ETF (CPD). iShares has done an excellent job with this fund, attracting over $1.1 billion of assets since its inception in 2007. Many investors are already familiar with other popular iShares funds, and they’d be right at home adding income to their portfolio with CPD.

What I like most about CPD is its respectable dividend yield of 5.34% and low MER of 0.50%. It accomplishes this by seeking to replicate the S&P/TSX Preferred Share Index, which gives investors exposure to preferred shares other than the common rate reset type. This includes floating rate, perpetual, and retractable preferred shares. By tracking this index, CPD holds more issues of preferred shares than the other ETFs on this list, with 196 total holdings.

DCP ETF Review

One interesting fund is the Desjardins Canadian Preferred Share Index ETF (DCP). Established in 2017, DCP invests in rate reset preferred shares and offers a dividend yield of 4.96% and an attractive MER of 0.46%.

DCP’s MER and yield are comparable to some of the other preferred share ETFs in Canada. Still, I personally wouldn’t invest in DCP for one simple reason: it’s too small! At just $28 million in assets, I’m not sure that DCP will even be around too much longer – fund managers tend to close funds that don’t attract enough assets. Also, given that it’s so small, DCP doesn’t benefit from the economies of scale like some of the other ETFs I’ve listed. So I’m skeptical that its 0.46% MER can be maintained without attracting more assets.

HPR ETF Review

Another great preferred share ETF is the Horizons Active Preferred Share ETF (HPR). Due to its active strategy, HPR has a slightly higher MER than the other ETFs on this list, at 0.64%. Despite this, ZPR manages to yield an impressive 4.42% and has accumulated nearly $1.2 billion in assets.

What’s unique about HPR is that Horizons asserts that the fund may invest in assets many would consider outside the scope of a regular Canadian preferred share ETF. This includes U.S. preferred shares, fixed income, common stock, and even other ETFs. However, looking at ZPR’s holdings, it appears that approximately 98.5% of its assets are currently invested in preferred shares. So, for the most part, the focus of HPR has been and will certainly continue to be Canadian preferred shares.

PPS ETF Review

The Invesco Canadian Preferred Share Index ETF (PPS) is another interesting preferred share ETF. It boasts a healty 5.29% dividend yield and an attractive 0.48% MER. PPS seeks to replicate the NASDAQ Select Canadian Preferred Share Index and has 59% of its assets invested in preferred shares from the financial sector – higher than most other Canadian preferred share ETFs.

However, like Desjardins Canadian Preferred Share Index ETF (DCP), Invesco’s PPS may be too small to consider with only $101 million in total assets – a minuscule amount for an ETF.

RPF ETF Review

The RBC Canadian Preferred Share ETF (RPF), is another exceptional choice for anyone looking to add preferred shares to their portfolio. Unlike ZPR and CPD, which are both index ETFs, RPF is the first ETF on this list that uses active management to build its portfolio. Primarily investing in rate reset preferred shares from some of Canada’s largest companies, RPF offers investors a dividend of 5.37% with an MER of just 0.58%.

RPF has only been around since 2016, which makes it the youngest ETF on this list. Despite that, RPF has already accumulated over $664 million in assets and is growing fast. And why not? It’s an excellent choice for investors who prefer active management while still taking advantage of the low-cost ETF structure.

TPRF ETF Review

The TD Active Preferred Share ETF (TPRF) is seeks to replicate the performance of the S&P/TSX Preferred Share TR Index. What’s unique about TPRF is that although it focuses on Canadian-listed preferred shares, it also invests in a small amount in preferred shares from outside of Canada. For example, it currently has 8.9% of its assets invested in Europe and Asian markets, 4.7% in the U.S., and 2% in Latin America.

With a dividend yield of 5.62% and a MER of 0.50%, TPRF is competitive with the other preferred share ETFs in Canada. At 176 holdings, TPRF is also very diversified for a preferred share ETF, making it an excellent choice for anyone comfortable investing a portion of their funds in preferred shares from outside of Canada.

ZPR ETF Review

One of the best preferred share ETFs in Canada is the BMO Laddered Preferred Share Index ETF (ZPR). Established in 2012, the BMO Laddered Preferred Share Index ETF has attracted $1.7 billion in assets. This makes ZPR the largest preferred share ETF in Canada – and for good reason. With an MER of just 0.50%, ZPR has established itself as a low-cost alternative to building a DIY portfolio of preferred shares. In addition to this low MER, ZPR offers investors a monthly dividend yielding 5.67% annually. That’s a higher yield than all of Canada’s big banks and many of the income-focused equities listed on the TSX.

So how does ZPR achieve this high yield year after year? Well, ZPR primarily invests in rate reset preferred shares. These are preferred shares that offer a dividend payment that resets every 5 years based on the 5-year Government of Canada bond yield plus some defined premium.

Rate reset preferred shares allow investors to take advantage of higher yields when rates rise. These types of preferred shares can also be used in a laddered strategy to mitigate lost income as interest rates fall. ZRP uses this laddered strategy and works to ensure that no more than a fifth of their preferred shares reset in any given year. This strategy, combined with its high dividend yield, low MER, and conservative credit allocation, makes ZPR the best preferred share ETF in Canada.

Comparing the Best Preferred Share ETFs in Canada

Preferred Share ETF Fundamentals

Looking at the fundamentals, we can see that each of the top preferred share ETFs in Canada yield around 5%. That means investing $10,000 would earn around $5 per year in monthly dividends. Each fund also has around 100 to 200 different holdings, with Horizons HPR being less transparent with their total number of holdings.

Preferred Share ETF Sectors

Each of the preferred share ETFs have much of their assets invested in financials, with insurance and energy making up a large portion of the remaining assets. That’s to be expected, as financials make up such a huge portion of the Canadian stock market. The funds have only a small amount of assets invested in technology, health care, or materials sectors.

Credit Allocation of Preferred Share ETFs

Preferred shares are categorized based on the credit quality of their issuer. The three investible ratings are “P1”, “P2”, and “P3”. Companies whose senior bonds are rated “AAA” or “AA” typically have their preferred shares rated P1. Companies whose senior bonds are rated “A” are given a P2 rating. And finally, companies whose senior bonds are rated “BBB” are given a P3 rating. Ratings of P4 and P5 are also used but are reserved for more speculative issues.

By reviewing a fund’s credit allocation, investors can infer how safe it is relative to its competitors. However, not all ETFs make this information easily accessible.

What’s most surprising about these credit allocations is that the active funds, RPF and HPR, hold significantly more P3 rated preferred shares. Despite this, their dividend yields aren’t larger than ZPR, which invests less of its assets in the riskier category of preferred shares.

Past Performance of Preferred Share ETFs

The funds have performed comparably over the past 5 years. In times of crisis, preferred share ETFs tend to move with the broader equity market. While during regular times, preferred share values are driven by interest rate changes.

For example, in 2018 interest rates rose in Canada. This caused preferred shares to lose value as investors invested in newer, higher-yielding bond and preferred share offerings.

We saw much of the same last year in 2022, where interest rates rose dramatically and so preferred shares lost value. Expect to see preferred share ETFs to continue to decline in price if rates rise even more in 2023.

Closing Thoughts on Preferred Share ETFs

Each of the best preferred share ETFs in Canada are competitive on price, with MERs all hovering around 0.50%. And while this may be high for an index portfolio of domestic common stock, I believe the higher fee may be justified for a portfolio of preferred shares.

For one thing, preferred shares are frequently being redeemed as businesses see fit. Other preferred shares reset periodically, and decisions must be made to lock in a fixed rate or accept a variable rate. Preferred shares are often also convertible, so asset managers need to decide if it’s an appropriate time to convert the preferred shares into common stock. These decisions can add up and make managing a portfolio of hundreds of preferred shares time-consuming and costly.

Canada’s preferred share market is small, at just $76 billion in total assets. Because of this, each of the best preferred share ETFs in Canada holds a lot of the same issues of preferred shares. Even the active ETFs like Royal Bank’s RPF and Horizons’ HPR hold many of the same assets as their indexing counterparts.

The Best Preferred Share ETF in Canada

I consider the BMO Laddered Preferred Share Index ETF (ZPR) to be the best preferred ETF in Canada. I make that decision based on its ideal combination of yield, MER, and credit allocation.

However, unlike with many other asset classes, none of the ETFs in this list are a true slam dunk over the competition. Each has similar MERs and similar dividend yields. They’ve also all performed comparably over the past few years. So, while I like ZPR’s strategy of using a ladder of rate reset preferred shares, a case can be made to justify investing in any of the other popular preferred share ETFs in Canada.

Thanks for Reading!

Thank you so much for reading! If you’re interested in investing, please read my recent article on the best gold ETF in Canada and my article on the best dividend ETFs for Canadians.