Canadian Preferred ETF to Debut

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Access to foreign fixed income from exchange traded products continues to grow as the Global X Canada Preferred ETF is scheduled to debut on Wednesday under the ticker symbol CNPF.

The first funds in this segment offer broad based exposure which includes some of the worst countries like Japan and Western Europe but that is changing as investors recently gained access to Asia ex-Japan, Latin America, now Canada and next month Australia.

There are several domestic preferred stock ETFs which came out before the financial crisis but I wrote that they were unattractive due to risk I felt existed in the financial sector at the time.

The Canada Preferred ETF is also heavy in financial stocks but the Canadian financial sector is on much firmer fundamental footing than the domestic financial sector. The reason these ETFs are so heavy in financial stocks is that financial companies are the heaviest issuers of preferred stock.

The Canada Preferred ETF allocates 73% to financial companies, 10% to energy, 8% to consumer stocks, 6% to telecom with the rest in utilities. There is not much value in looking at the fund's top 10 holdings as the fund owns up to three different preferred issues from several companies, including Bank of Montreal ( BMO), Bank of Nova Scotia ( BNS), BCE (the telecom company), and TransCanada ( TRP).

The total exposure to these companies is 6.9%, 7%, 4.7% and 8.4% respectively. There are a total of 24 issuers in the fund but it is worth noting that Brookfield Asset Management and Brookfield Office Properties are related companies and each have three issues in the fund.

The complete list of holdings should be on the Global X website in a couple of days and I would suggest looking at the entire roster, not just the top 10 holdings. That's because it's important to understand is that there no reasonable risk of some event hurting just one preferred stock from an issuer. A debt downgrade would affect all preferred issues from a company as we saw in 2008 in the domestic market.

The fund is expected to have 58 holdings, the underlying index has a yield of 5.1% which after accounting for the 0.58% expense ratio should put the yield near 4.5% but as with all ETFs, the yield can fluctuate.

I do believe that issuer weightings that top out in the 7% to 8% range does mitigate issuer risk within the fund. Some sort of cataclysmic event in Canada as happened in the U.S. where companies implode and markets cease to function normally and obviously this fund would be the wrong place to invest.

In that light, it is worth understanding at least a little about the Canadian housing market and Canadian mortgage market. Loan quality and capital ratios have generally been superior to the U.S. with fewer signs of overheating with a glaring exception being the Vancouver housing market which appears to be the target of buying demand from Asia. The more prudent lending should mean little to no threat to the solvency of the Canadian banks should the housing market decline significantly.

Canada is a much healthier economy than the U.S. as it benefits from increased global demand for oil and recent increased political tension in the Middle East. Put simply, Canada has a lot of something the world must have and the country should continue to prosper making exposure to the equity market and fixed income market attractive to U.S.- based investors for the stability of the debt, the potential for price appreciation of the Canadian dollar over the U.S. dollar but with a superior yield to the Rydex Canada Currency Shares ( FCX).

Disclosure: Bank of Nova Scotia client holding

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Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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