Evolve launches Canadian preferred share ETF on TSX

Sep 26th, 2019 | By | Category: Alternatives / Multi-Asset

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Evolve Funds has launched a new ETF in Canada, providing exposure to the local preferred shares market.

Raj Lala, President and CEO of Evolve ETFs

Raj Lala, President and CEO of Evolve ETFs.

The Evolve Dividend Stability Preferred Share Index ETF (PREF CN) has listed on Toronto Stock Exchange (TSX) and comes with an expense ratio of 0.60%.

Preferred shares are hybrid securities that fall between debt and common stock in the seniority of a firm’s capital structure. Although technically equities, they have many bond-like qualities.

They tend to pay a fixed or floating-rate dividend, making them sensitive to changes in interest rates. Although dividends can be suspended by a company’s board without the risk of default, some preferred shares may be cumulative in that unpaid amounts are accrued until the dividend is reinstated.

Although they display similarities to both equity and fixed income, preferred shares have exhibited a low correlation with both these asset classes in the last five years, potentially making them an attractive option for investors looking to reduce overall portfolio volatility.

Methodology

The fund is linked to the Solactive Dividend Stability Canada Preferred Share Index which selects its constituents from a universe of CAD-denominated preferred shares trading on TSX. To be eligible for selection, firms must have a minimum market capitalization of C$100 million and average daily trading volume over the past 12 months of at least C$100,000.

The index will only include preferred shares that have a credit rating of P3 or higher from S&P Global Ratings Canada or Toronto-based DBRS. P3 ratings generally correspond with companies whose senior bonds are rated just above high yield – in the higher end of the BBB category.

The methodology selects 50 preferred shares that have a market price closest to their par values, weighted by market value with an issuer cap of 15%. Index reconstitution and rebalancing occur on an annual basis.

The index currently has a yield of 5.3%. Distributions from the fund are sent to investors on a monthly basis.

Raj Lala, President and CEO at Evolve ETFs, commented, “We are pleased to provide Canadian investors with another preferred share option. In the past year, the performance of the Canadian preferred market has been challenging and historically this has led to tax-loss selling pressure at year-end.

“PREF may be an ideal solution for investors who are considering tax-loss selling and still want to remain invested in the asset class through a portfolio of Canadian preferred shares with high credit quality, stable dividends, and currently trading close to par.”

Evolve also offers the actively managed Evolve Active Canadian Preferred Share Fund (DIVS CN) which invests primarily in the Canadian preferred share market but also targets opportunities in the US and internationally. The fund is sub-advised by Toronto-based Foyston, Gordon & Payne, a value-style investment management firm that specialises in investing in companies offering sustainable income streams. It comes with an expense ratio of 0.65%.

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