Best Preferred Share Fund?

Where is your comfort zone on the risk reward scale?  How far will you walk out before feeling uneasy about taking the plunge on different types of investment?

Preferred shares and funds strike a good balance between risk and reward. The value of preferred shares in creditworthy companies tends to remain steady relative to common shares.  Dividends are paid quarterly and can sometimes be "cumulative", meaning your dividends have to get paid before those of common shareholders.

The following chart shows the variability of BCE Inc. common shares (5.27 %) relative to their preferred share series K (4.06% dividend).  Obviously the higher dividend of the common shares comes at a price.

Preferred share funds offer diversification over holding individual preferred shares.  Options include BMO S&P/TSX Laddered Preferred Share Index ETF (Ticker ZPR).  Holds a diversified set of shares from several industries (details), and is 'laddered' to manage interest rate sensitivity.  The current yield is 4.87 % and would qualify for dividend tax credits, effectively increasing the yield after the credits.  The annual management fee is only 0.45%.

Want more enhanced returns?  Consider a fund like the Malachite Aggressive Preferred Fund which combines trading of preferred shares to enhance overall returns.  The results speak for themselves as the fund returned a healthy +12.76% (after expenses, before fees) compared to +5.50% for its benchmark BMO-CM “50″ Index last year.  The fees are reasonable (1% on the first $500,000, 0.75% on the next $500,000, and 0.5% on the balance) and can best be described as great value.  Yes, you could save 0.5% on fees by holding iShare's S&P/TSX Canadian Preferred Share Index Fund (Ticker CPD) - but since CPD's 12 month return was only 4.9%, why not pay an extra 0.5% to earn an additional 7% through Malachite's trading expertise?

Check out the Malachite returns on the PrefBlog.  The fund is available directly through Hymas Investment Management, or through Odlum Brown Limited.