Exchange-Traded Funds have exploded in popularity as they offer relatively low risk and low fees to investors who are happy to tie their investments to an underlying index. The asset class has more recently sprung boutique offerings, which combine many of the benefits of ETFs with the upside of active, professional management. Doug Grieve, chief investment officer with Slater Asset Management, sat down with The Financial Pipeline to discuss what’s involved in preferred share ETFs.
Exchange-Traded Funds have exploded in popularity as they offer relatively low risk and low fees to investors who are happy to tie their investments to an underlying index. The asset class has more recently sprung boutique offerings, which combine many of the benefits of ETFs with the upside of active, professional management. Doug Grieve, chief investment officer with Slater Asset Management Inc., sat down with The Financial Pipeline to discuss what’s involved in preferred share ETFs.
FP: How is a preferred shares ETF different from any other ETF?
DG: ETFs have been around quite a while, but the earlier ones were just driven to replicate indices. What’s now evolving is more of an actively managed ETF, to get away from that index concept and toward a mutual fund pooled, professionally managed, that still has the ETF structure. It’s not bound by what the index owns; you can customize the ETF. Preferred shares are a good asset to offer in an ETF because individual investing in preferred shares has been a challenge for many investors.
FP: So it’s the complexity of preferred shares that makes them a good fit for these types of ETFs?
DG: With preferred shares, you need to know what you’re doing. Some of them are complicated and confusing. When you buy preferred shares on an individual basis, the liquidity on them is not necessarily ideal. A preferred shares fund would be managed by someone who can access ways of getting liquidity probably better than the individual, and can also give the investor access to dozens of preferred shares issues that are pooled together. The client will own a piece of that pooled fund, with more diversity and liquidity than would otherwise be available because he or she owns pieces of different preferred shares.
FP: What type of investors are preferred share ETFs a good fit for?
DG: They are good for people who are a little bit older, likely retired, and who want capital preservation as well as the chance to earn a living off their existing holdings. Preferred shares, actively and professionally managed, can offer a compelling yield and a tax-efficient opportunity for investors.
FP: What other considerations should investors keep in mind when debating whether they want to get into this type of investment?
DG: Preferred shares do have a little bit more volatility than GICs or Government of Canada bonds, but in an after tax return you get quite a bit more.
FP: What would you say to those investors who got scared off preferred shares after the 2015 rate reset in Canada?
DG: The Canadian preferred shares market underwent a pretty significant correction, but it was a unique problem. The price of oil impacted the preferred shares market as a result of the government of Canada bond yields going so low, and that was a real surprise, the market was not expecting it. It looks like it’s completed its correction, oil has come back, and therefore the Government of Canada seems to have taken the gas off the pedal of its commitment to lowering rates. I’m quite comfortable with the asset class, but for investors who have concerns, it’s certainly something that you want to have outsourced, and the preferred shares ETF is in fact that.