TXPL: New Preferred Share Index with ETF (ZPR)

Standard & Poor’s has announced:

the launch of three new Canadian indices: the S&P/TSX Preferred Share Laddered index, the S&P/TSX Equal Weight Global Gold index and the S&P/TSX Equal Weight Industrials index. Each of the indices has been licensed by S&P Dow Jones Indices to BMO Asset Management for potential exchange traded products to be listed on Toronto Stock Exchange.

The S&P/TSX Preferred Share Laddered index was created in response to investors’ ongoing demand for income producing securities.

“We are excited to announce these three new additions to the S&P/TSX family of Preferred Share and Equal Weight indices,” says Abigail Etches, Director at S&P Dow Jones Indices. “Canadian investors are increasingly looking for industry specific indices that are liquid enough to serve as the basis for investment products and relevant enough to serve as key benchmarks of performance. These indices are unique in that they offer investors an additional means of measuring these segments of the market while potentially offering an additional means for diversifying their portfolio.”

“BMO Asset Management is committed to offering innovative exposure to the leading segments of the market through exchange traded funds,” said Kevin Gopaul, Chief Investment Officer and Senior Vice President, BMO Asset Management Inc. “We’re thrilled to be once again partnering with S&P Dow Jones and TMX Group, global leaders in indexing, to provide investors with more insight and choice.”

The FactSheet and Methodology are available at the TXPL Index Website. According to the FactSheet:

  • Exhchange (sic) Listing. Preferred shares listed on and trading in Canadian dollars on the Toronto Stock Exchange are eligible for inclusion.
  • Type of Issuance. Preferred shares issued by a company to meet its capital or financing requirements are eligible. Split shares and synthetic preferred shares are not included in the index. Issues are eligible for inclusion when their reset dates are five years or less.
  • Market Capitalization. The preferred shares must have a total market capitalization of more than CAD 100 million as of the rebalancing reference date, based on the volume-weighted average price over the last three trading days of the month prior to the quarterly review.
  • Volume. The preferred shares must have a minimum trailing three-month average daily value traded of CAD 100,000 as of the rebalancing reference date.
  • Rating. Preferred shares must have a minimum rating of P-3 or its equivalent from Standard & Poor’s, Dominion Bank (sic) Ratings Service or Moody’s Investor Service. If more than one of the ratings agencies has issued a rating on the stock, the lowest rating is used to determine eligibility.
  • Indicated Yield. Preferred shares for which S&P Dow Jones Indices cannot determine an indicated annual dividend yield are not eligible.
  • Different Lines of the Same Issuer. There is
    no limit to the number of lines of a single company’s preferred share allowed in the index; however, a maximum weight of 10% is set per issuer. All eligible lines for an issuer are included in the index and capped on a pro rata basis to a maximum of 10% by issuer of the index market capitalization.

Each term bucket, as defined by the calendar year of each constituent’s rate reset, is equal weighted at each rebalance. Within each bucket, individual securities are weighted by market capitalization. The weight of each individual bucket may be subject to change depending on the market conditions and the universe of Canadian preferred shares. At the onset of the index, there will be five equally weighted buckets. Should the number of buckets be reduced to four or less in the future, each bucket will be equally weighted at each rebalance.

A term bucket containing an insufficient number of issues may be combined with the nearest term bucket. In order for each term bucket to have a sufficient number of issues, it should have a minimum of four outstanding issues or a combined market cap of at least 5% of the eligible securities total market capitalization. The requirements for a term bucket are subject to change based on market conditions and the universe of the Canadian preferred shares.

According to the Methodology:

The index is rebalanced on a quarterly basis; changes are effective after the close of trading on the third Friday of January, April, July and October.

This is the same effective date as TXPR. Presumably the announcement date will also be the same.

Whenever possible, announcements of additions or deletions of shares or other index adjustments are made five trading days before the adjustments are implemented. In those cases when it is not possible to trade a stock five days after an announcement, the announcement period may be shortened. However, the implementation of an index adjustment is never earlier than the market close of the day following the announcement.

Announcements of additions and deletions for the S&P/TSX Canadian indices are generally made at approximately 05:15 PM. Eastern Time. Press releases are released to major news services.

This looks like a rush job to me. The reference to “Dominion Bank Rating Service” is repeated in the methodology; footnote 1 on page 5 of the PDF states:

The index was launched in April 2007. Prior to that time, the index was back tested using Standard & Poor’s ratings only.

… which is true for TXPR, but not TXPL. On page 7 they give the Index Name and Bloomberg & Reuters Codes for TXPR, but not TXPL.

I couldn’t find an announcement from BMO, but according to Investment Executive:

S&P Dow Jones Indices and TMX Group Inc. Monday announced the launch of three new Canadian indices: S&P/TSX Preferred Share Laddered index, S&P/TSX Equal Weight Global Gold index and S&P/TSX Equal Weight Industrials index.

Each of the indices has been licensed by S&P Dow Jones Indices to BMO Asset Management for potential exchange traded products to be listed on The Toronto Stock Exchange.

S&P/TSX Preferred Share Laddered index was created in response to investors’ ongoing demand for income producing securities.

… and according to Canadian Couch Potato:

The BMO Laddered Preferred Share (ZPR) is unique because all of its holdings are what are called rate reset preferreds. These have a specific call date, usually every five years, on which the holder can choose to lock in a new dividend at current rates, or convert to a floating rate that will change monthly or quarterly based on a reference rate. By contrast, CPD is about one third perpetual preferreds, which have no maturity date and pay the same fixed dividend as long as they are outstanding.

I will note that FixedResets also have no maturity date.

… and according to ETF Insight:

Earlier this week, BMO ETFs filed a preliminary prospectus for 4 additional ETFs:
  • •BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN)
  • •BMO S&P/TSX Equal Weight Global Gold Index ETF (ZGD)
  • •BMO S&P500 Index ETF (ZSP/ZSP.U)
  • •BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR)


S&P/TSX Laddered Preferred Shares Index ETF (ZPR) – Preferred Shares have attracted meaningful inflows in recent years, with the benchmark S&P/TSX Preferred Share Index ETF (CPD) notably seeing its assets rise by a factor of 1.75X year-over-year (from Sept 2011-Sept 2012), to reach over $1.3Bn of AUM, an over 4X increase from the assets it held 3 years prior. To set itself apart, BMO ETF has elected to focus on Preferred Shares featuring rates resets, and applying a laddered approach to their ETF. The metrics (cash yield, weighted YTM, duration, credit quality, etc) for this ETF relative to the other 3 ETFs (CPD / HPR / PPS ) covering the Canadian preferred shares space in our market will be interesting to examine when they become available.

According to the completely useless dummies at SEDAR (who have jobs only because they’ve been granted a regulatory monopoly):

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Update, 2012-11-20: BMO has announced:

BMO Asset Management Inc. (BMO AM) today introduced four new funds to its Exchange Traded Fund (ETF)* product suite.

“In today’s financial environment where the markets are constantly changing, people are looking for investment products that can keep pace with these changes, and we have had that in mind when expanding and evolving our lineup,” said Kevin Gopaul, Chief Investment Officer and Senior Vice President, BMO Asset Management Inc. “BMO Asset Management is a leader in providing innovative, timely and competitive ETF products. These four new funds are just the latest example of how we strive to anticipate and fulfill critical investor needs.”

The offering of the following new ETFs has closed and they will begin trading on the Toronto Stock Exchange today:

BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR)
•Uniquely designed to reduce interest rate sensitivity compared to the preferred share market by using rate resets, while providing investors with portfolio diversification and tax-efficient dividend income.

According to the web page for ZPR the Portfolio Yield, as defined, is 4.89% and the maximum MER is 45bp (5bp below CPD!). However, the Portfolio Yield definition is:

Portfolio yield is calculated as the most recent income received by the ETF in the form of dividends interest and other income annualized based on the payment frequently divided by the current market value of ETFs investments.

… in other words, the Current Yield, which does not account for expected capital losses due to calls, or for expected changes in dividend income when the dividends of the current holdings are reset (which, given the yield of the Canada 5-year bond, will generally be large and negative). The fund holds 100 issues.

8 Responses to “TXPL: New Preferred Share Index with ETF (ZPR)”

  1. […] was a suddenly negative day for the Canadian preferred share market as it welcomed the new ETF (ZPR), with PerpetualPremiums losing 26bp, FixedResets down 21bp and DeemedRetractibles off 16bp. […]

  2. […] some changes to their index methodology without issuing a press release; not only that, but the rush-job typographical errors on the TXPL methodology now appear to have been fixed, but is now linked on the web page for TXPR as well as the web page […]

  3. J says:

    Is it possible to make some asumptions about ZPR vis a vis:

    – expected capital losses due to calls,

    – expected changes in dividend income when the dividends of the current holdings are reset (which, given the yield of the Canada 5-year bond, will generally be large and negative)

    and come up with a true epected yeild?

  4. jiHymas says:

    The fund makes its holdings public at the ‘Holdings’ tab of its website, so assumptions regarding future calls and yields can be made without having to guess about index weights. The FixedReset Yield Calculator can be used to perform the individual calculations. That will be a pretty tedious job, though, since the fund holds 100 securities.

    That’s actually a good idea for the next PrefLetter and I intend to extend the November review of ETFs and funds with a short piece in the December edition with respect to ZPR.

    As an approximation, I suggest that you simply look at the yield of the HIMIPref™ FixedResets sub-index; the median YTW of the index will probably be pretty close to the YTW of the fund.

  5. […] low. FixedResets dominated a day of relatively low volume, perhaps influenced by a move towards the new FixedReset ETF, ZPR, which now claims to have $5.2-million under management and traded slightly under 40,000 […]

  6. big easy says:

    If indeed the YTW is the same as the HIMIPref Fixed Resets sub-index, then 2.5% (net of 0.45% MER) with the dividend tax credit doesn’t seem too bad for a taxable account. Should be less volative than CPD.

  7. J says:

    Wow thanks Mr Hymas and Big Easy. I really appreciate you taking the time to share back.

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