From time to time, things happening in financial markets just don't make much sense.
There is a reasonably large seller in the market of a Canadian preferred share ETF, likely because the ETF is now holding a greater amount of the Fixed-Rate Reset Preferred Shares and with the current level of low interest rates, when the rate on these types of preferred shares are reset, they are reset at lower levels paying a lower dividend as a result and making the issue less attractive.
Preferred share markets are not as actively traded as common share (equity) markets and therefore there is somewhat less liquidity. As a result, a large seller can move the market price lower without much trading volume.
However, when the ETF basket is sold, all of the preferred shares in the basket are sold, including the Perpetual Preferred Shares with fixed dividends. Naturally this pushes the prices of these perpetual preferred shares lower and as a result of the fixed dividend, pushes the dividend yield higher (and this is what does not make sense): higher returns (dividend yield) in a low return environment.
What are the risks of owning Perpetual Preferred Shares ?
At the moment, some of the good quality issuers' Perpetual Preferred Shares look very reasonably priced, relative to the bond market and this may be a good opportunity to add these income producing assets to a portfolio if you have room to do so in your diversified, balanced portfolio.
Determining whether you have room is a more complex decision and should be done in conjunction with professional assistance.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist