ZPR.U: A Steady Beacon of Income in a Rising Rate World

The BMO Laddered Preferred Share Index ETF (ZPR.U) stands out as a compelling income-generating vehicle in an era of rising interest rates. Designed to capitalize on the unique characteristics of preferred shares while mitigating reinvestment risk, this USD-denominated ETF offers investors a rare blend of stability and yield. With a forward dividend yield of 4.96% as of May 2025 and a laddered structure that buffers against rate volatility, ZPR.U is positioned to thrive in today’s economic climate.

Why Preferred Shares Excel in Rising Rates

Preferred shares occupy a sweet spot in the capital structure: they rank senior to common equity but junior to bonds. This positioning grants them higher dividend yields than many equities while offering less sensitivity to interest rate swings compared to long-dated bonds. Unlike bonds, which can decline in value as rates rise, preferred shares often maintain stable prices because their fixed dividends are paid before equity holders.

But ZPR.U’s true advantage lies in its five-year laddered structure. The ETF replicates the Solactive Laddered Canadian Preferred Share Index, dividing its holdings into annual maturity buckets (e.g., 1-year, 2-year, up to 5-year terms). Each year, a portion of the portfolio matures, allowing the ETF to reinvest the proceeds into new preferred shares at higher rates as central banks tighten monetary policy. This dynamic ensures that rising rates don’t erode income streams but instead become a tailwind.

The Numbers That Matter

• Dividend Yield: At 4.96% as of May 2025, ZPR.U’s forward yield outpaces the 10-year U.S. Treasury yield by over 300 basis points. Its monthly distributions of $0.068 per unit (annualized to $0.816) provide steady income, with minimal fluctuation over the past year.
• Expense Ratio: A rock-bottom 0.50% ensures that nearly all of the ETF’s returns flow to investors, unlike actively managed funds that siphon off fees.
• Risk Mitigation: The laddered design reduces reinvestment risk. For example, if rates rise by 1% in 2026, the ETF’s 1-year bucket will mature, and those funds can be reinvested at the higher rate, boosting future cash flows.

A Portfolio Anchor in Uncertain Times

While the Bank of Canada and Federal Reserve have paused rate hikes, the era of low yields is over. In this environment, traditional income assets like bonds face headwinds, but preferred shares—particularly those structured into ladders—offer a shield against volatility. ZPR.U’s diversified portfolio, weighted toward utilities and financials (its top holdings include Fortis Inc. and Canadian Utilities Ltd.), further stabilizes returns.

Critics may note that preferred shares rank below bonds in the capital structure, but the ETF’s focus on investment-grade issuers (e.g., Enbridge, National Bank) minimizes default risk. Moreover, the laddered approach ensures that no single maturity exposes investors to prolonged reinvestment at low rates.

Why Act Now?

With the Federal Reserve’s terminal rate now likely above 5%, the window to lock in high yields is narrowing. ZPR.U’s dividend yield is set to grow as maturing shares are reinvested at current elevated rates. For income-focused investors seeking to avoid the pitfalls of bonds and the volatility of equities, this ETF offers a rare trifecta: income, stability, and inflation resilience.

Final Take

In a world where income is scarce and certainty is rarer, ZPR.U stands as a prudent choice. Its laddered structure, robust yield, and low costs make it a cornerstone for portfolios navigating a high-rate environment. For those who prioritize steady cash flows without taking excessive duration risk, this ETF is a buy—before rates rise further.

Investors should review the ETF’s prospectus for full risk disclosures, including currency and interest rate risks.