Market Overview

Checking In: Oh Canada Preferreds

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Over the past couple of years, investors have gradually become more acquainted with preferred stocks and the ETFs that track them. The rise in notoriety for preferred securities isn't surprising when considering a couple of factors.

First, preferred stocks have essentially been the only way to capture decent dividends and yields from bank stocks since the financial crisis. Second, in an environment where money markets and Treasuries are hardly worth an investor's time, preferreds are a far more lucrative option.

For a while, the universe of ETFs tracking preferred securities was limited to five funds, but that number increased by one in May with the introduction of the Global X Canada Preferred ETF (NYSE: CNPF). With an expense ratio of 0.58%, CNPF is home to 50 preferred issues and the ETF has done a fair job of attracting inflows with almost $8 million in assets under management.

The Global X Canada Preferred ETF does share one thing in common with other ETFs tracking preferred stock and that is a large weight to financials. In this case, we're talking about almost 77%. With an allocation of just under 13%, the energy sector is the only other double-digit allocation. CNPF also features light allocations to telecom, utilities and consumer discretionary and staples names.

CNPF's top-10 holdings include preferred issues from TransCanada (NYSE: TRP), Toronto-Dominion Bank (NYSE: TD), Bank of Montreal (NYSE: BMO), Royal Bank of Canada (NYSE: RY) and Canadian Imperial Bank of Commerce (NYSE: CM).

Since inception, CNPF has moved in lockstep with the S&P 500, but that also means the Global X offering has outperformed the PowerShares Financial Preferred Portfolio (NYSE: PGF) and the iShares S&P US Preferred Stock Index Fund (NYSE: PFF).

Factor in a distribution yield of 5.95% and a 30-day SEC yield of 3.74% and CNPF was clearly a better bet than the S&P 500. And since preferreds are all about yield, it's fair to say CNPF delivers on its objective.

Bull Case: Canadian banks have a well-deserved reputation for being more conservative and reliable than thei U.S. counterparts, giving CNPF the potential to continue to outperform rival funds that are heavy on U.S. banks.

Bear Case: Financial services stocks, regardless of home domicile, continue to languish due to pressures from Europe. This scenario would adversely impact CNPF.

Posted-In: Long Ideas News Short Ideas Dividends Dividends Specialty ETFs New ETFs Global Best of Benzinga

 

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