The asset class has had its challenges, but Evolve ETFs might have a solution for advisors looking for exposure
The Canadian preferred shares space has been a challenging one, down 0.20% YTD and 7.66% over the span of the year, ending Oct. 31, 2019. With them being highly correlated to the equity market, they took a hit in late 2018 and the interest rate cuts that followed exasperated the situation. The space currently sits at approximately $70 billion in assets and is heavily driven by supply and demand. Yet for advisors who are still looking for exposure, Evolve ETFs may have a solution.
“The preferred shares space has been a difficult asset class for investors,” said Raj Lala, Evolve ETFs, president and CEO. “We said, ‘if this continues then there will be a lot of tax-loss selling in the space come Q4’. As we looked closer, we realized most people end up doing their tax-loss selling in December and when everyone rushes to the exit, prices tumble, and liquidity is at a premium.”
Evolve looked back on other instances when the preferred shares market had been hit and realized that it made sense to create a two-phased product: the Evolve Dividend Stability Preferred Share Index ETF (PREF).
The first phase looks at those selling out of single-line preferred shares or preferred share funds for tax losses. Evolve created a more conservative approach, explains Lala. “When you look at the preferred shares space today, it is pretty attractive. You get 5-6% tax advantage yields and when you compare to a corporate bond investment, the risk/reward ratio makes sense. We think advisors will sell out of other positions, single lines or ETFs, but still want to stay in the space because of the yield being offered.”
The second phase was more of a long-term approach, looking to attract advisors who were under exposed or that weren’t sure where the preferred shares market was going. Those who wanted exposure, but not the risk of other options.
Since its launch in September, the fund has had less volatility that other funds or single-line shares. “On the tax-loss selling side, one criteria was to take the 50 preferred shares trading closest to par. Right now, the average price in our portfolio is just about $25, so a little above par. The reason that is important is it means the underlying preferred shares have little to no losses, which means they shouldn’t be hit hard from tax-loss selling,” added Lala.
For advisors facing tax-loss selling situations, Lala reminds them that they can carry tax losses forward or go back three years. Funds such as his also exchange single line and other funds for units of their fund, increasing options for advisors to get easy access to the space.