The Solactive US Preferred Share Select Index and the Solactive US Preferred Share Select Hedged to CAD Index bring to the market a new smart beta approach to investing in US preferred shares. Specifically, these indices track the performance of higher dividend paying US-listed preferred shares that have been selected based on a set of market-cap, quality and liquidity screenings. The Solactive US Preferred Share Select Hedged to CAD Index takes the concept a step further by adding a currency hedging to Canadian Dollars through FX forward contracts. These indices are used as the underlying indices for the BMO US Preferred Share Index ETF (ZUP/ZUP.U) and the BMO US Preferred Share Hedged to CAD Index ETF (ZHP).
Preferred shares are a special equity class. Similar to common shares, they too represent an ownership claim on the company’s assets and earnings. However, what sets preferreds apart is the fact that they also share some characteristics with fixed-income securities. Specifically, preferred shares expose investors to regular cash disbursements in the form of fixed dividend payments that have been predefined at issuance as a percentage of their face value. Holders of preferred shares have priority on dividend payments over common shares. In addition, in case of company insolvency, preferred shareholders benefit from preference treatment in the liquidation process, coming second in line after debtholders in the redistribution of the company’s assets. These characteristics can expose investors to more stable and predictable returns on stock ownership compared to common shares.
Henning Kahre, Head of Research, Solactive AG, commented: “The Solactive US Preferred Shares Select Index and its currency-hedged version, the Solactive US Preferred Share Select Hedged to CAD, follow an income oriented strategy applied to preferred shares listed in the US. Products linked to these indices allow investors to gain diversified and cost-efficient exposure to high-rated US preferred shares with an above average distribution yield.”
The Solactive US Preferred Shares Select Index is a Net Total Return index denominated in CAD. The weighting scheme is based on the dividend yield of index components with a 3% cap per issuer to avoid concentration. The composition is readjusted quarterly. For inclusion, issues must meet a minimum market capitalization of USD 100 million and a minimum monthly volume traded over the last 6 months of 250,000 shares. The Solactive US Preferred Share Select Hedged to CAD Index replicates the Solactive US Preferred Share Select Index while hedging the currency exposure to CAD on a monthly basis via FX forward contracts. Its composition is readjusted monthly.
