You can learn a lot about how conservative Canadian investors are by the ETF they made the top seller last year.
In a year when stock markets around the world were surging, the ETF that Canadian investors put the most money in was the BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR). How conservative is that?
The past year saw Canadian investors pull massive amounts of money out of Canadian bond ETFs, which is understandable if you buy into the idea that interest rates have nowhere to go but up. In fact, bond funds were hammered last summer when rates ticked higher on news that the U.S. Federal Reserve was looking ahead to a reduction in its support for the bond market. You might expect that the money flowing out of bond ETFs would go into equity ETFs, particularly those in the high-flying U.S. market.
Instead, the ETF sales champion last year turned out to be ZPR, an ETF you buy when you want a conservative source of equity income and could not care less about growth. ZPR does offer a distribution yield of 4.6 per cent, which looks particularly good in taxable accounts because the dividend tax credit comes into play. But while the S&P 500 was making 35 per cent last year, ZPR lost 3.3 per cent.
ZPR tracks an index of Canadian rate reset preferred shares issued primarily by big blue chip stocks in the financial and utility sectors. Rate resets offer a degree of protection against rising rates in that their dividend rate is reset at five-year intervals. The laddering of ZPR means some of the shares in the portfolio are being reset on an annual basis, and that acts as a hedge against rising rates. In 2013, however, ZPR performed pretty much the same as the broadly diversified iShares S&P/TSX Canadian Preferred Share Index Fund (CPD).
If you want some background on what went wrong with some rate reset shares last year, you can find it here. Generally, the lesson here is that preferred shares are complex and hard to predict. They're good for providing tax-advantaged equity income, but you want to know what you're doing in buying them and you don't want to over-indulge.
This brings us back to ZPR, the sales champion from last year. Conservative investors piled into it, and they missed out on one of the best years in ages for the stock markets.
Rob Carrick