Horizons ETFs Canada has launched a new fund which provides tax-efficient exposure to Canadian preferred shares.

Steve Hawkins, President and CEO of Horizons ETFs.

The Horizons Laddered Canadian Preferred Share Index ETF (HLPR CN) has listed on Toronto Stock Exchange and comes with a management fee of 0.40%.

Preferred shares 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 tracks the Solactive Laddered Canadian Preferred Share Index which consists of Canadian fixed-rate preferred shares with an investment-grade rating and a time to maturity of six years or less. Only rate reset securities are included.

Eligible securities are assigned to one of five maturity buckets: one year, two years, three years, four years, and a bucket covering instruments with maturities beyond five years and less than one year. Constituents are weighted by market capitalization subject to caps of 12.5% per issuer and 20% per maturity bucket. Index reconstitution and rebalancing occur monthly.

Tax-efficient exposure

The ETF tracks its underlying index using synthetic (total return swap) replication. While the underlying preferred shares in the index pay dividends, the ETF does not, and the value of any dividend payments in the index is capitalized in the fund’s net asset value.

This is intended to enable greater tax efficiency for investors who hold the ETF in non-registered investment accounts. Non-registered accounts are a type of investment account that allows Canadian citizens to save money for the long term. Tax is only levied on the capital gains realized inside the account at 50% of the account holder’s top marginal tax rate. There is also no contribution limit.

The fund’s launch brings the number of tax-advantaged ETFs in Horizons’ line-up to 15.

Steve Hawkins, President and CEO of Horizons ETFs, commented, “ETFs have been a popular strategy for investors seeking access to preferred shares because they offer a one-ticket solution to the complexities and illiquidity of investing in this asset class.

“Horizons ETFs has already established itself as a leading provider of preferred share ETF solutions in the Canadian marketplace. HLPR is simply a new preferred share offering that is well-suited in taxable accounts since it is not expected to pay out any taxable distributions.”