Preferred shares don’t rank as high in investor consciousness as their common counterparts. But people should be aware that these securities offer a dependable cash flow. Preferred shares generally pay a fixed dividend, which means the payout qualifies under the Dividend Tax Credit, giving preferential tax rates. Investors can also access the preferred share market through Exchange Traded Funds. Doug Grieve, chief investment officer at Slater Asset Management Inc., discussed the pros and cons of these ETFs with Financial Pipeline co-editor Romina Maurino.
RM: If someone is looking at an exchange traded fund, that is a preferred share and they’re trying to look at the pros and cons. We’ve heard of diversification, less risk, there’s certain things that are definitely on the pro side. Are there any considerations that people should think about?
DG: Well there’s a couple of different preferred shares ETFs, some of them are more index-oriented and they’re literally just trying to replicate the index. What’s evolved more recently is what’s called an actively-managed ETF. It’s a professionally managed mutual fund, with all the attributes of an ETF. It’s easy to buy, you’re just buying one stock, but underneath that all, you’re actually buying a professionally managed portfolio, in this case, preferred shares. So an actively managed preferred share is a great way to go for reducing the risk, getting that diversification and knowing someone is actually paying attention to these preferred shares that are making up the ETF.
RM: So for anyone that is a bit more apprehensive about investing in these sort of things – sort of making the distinction between the actively-managed one and one that’s just following the index…
DG: Right. You want an actively-managed ETF, I think it’s better over just a straight index one. It’s just following a mandate, based on the index itself. I believe there’s less risk. The only thing is your transparency is a little more difficult, you don’t actually know all of the securities that are owned by that fund, you can find that out but it’s a little extra work that way.