A few years ago, my uncle – a recently retired engineer – called me to talk about his portfolio. He’d just moved a big chunk of his non-registered account into CPD, the iShares preferred share ETF. His reasoning? “It pays a fat dividend, it’s not as risky as stocks, and the dividends get the tax credit. It’s the best of both worlds.”

On paper, it sounded reasonable. Preferred shares sit between bonds and common stocks in the capital structure. They pay higher yields than most equity ETFs. And in Canada, those dividends qualify for the dividend tax credit, which makes them more tax-efficient than bond interest. What’s not to love?

Well, fast forward to today. His CPD position is down roughly 30% from where he bought it – even after collecting years of dividends. Meanwhile, if he’d simply put that same money into a globally diversified equity ETF like XEQT, he’d be sitting on substantial gains. The “safe” income play turned out to be one of the worst-performing corners of the Canadian market over the past decade.

This is a story I hear more often than you’d think. Preferred share ETFs sound appealing in theory, but their real-world track record tells a very different story. Let me walk you through exactly how XEQT stacks up against preferred share ETFs like CPD, ZPR, and HPR – and help you figure out whether either of them deserves a spot in your portfolio.

XEQT vs Preferred Share ETFs in Canada (CPD, ZPR): Income vs Growth Compared

1. What Are Preferred Share ETFs?

Before we compare anything, let’s make sure we’re on the same page about what preferred shares actually are.

Preferred shares are a hybrid security – part stock, part bond. They sit above common shares in a company’s capital structure (meaning you get paid before common shareholders if the company goes bankrupt), but below bonds. They typically pay a fixed or floating dividend, and that dividend must be paid before any common stock dividends.

In Canada, preferred shares are overwhelmingly issued by financial institutions – banks, insurance companies, and utilities. Think Royal Bank, Manulife, Enbridge, and similar blue-chip names.

There are three main preferred share ETFs available to Canadian investors:

• CPD (iShares S&P/TSX Canadian Preferred Share Index ETF) – The largest and most popular, managed by BlackRock. It tracks a broad index of Canadian preferred shares and has an MER of approximately 0.50%.
• ZPR (BMO Laddered Preferred Share Index ETF) – BMO’s offering, which focuses on rate-reset preferred shares (more on this in a moment). MER of approximately 0.45%.
• HPR (Horizons Active Preferred Share ETF) – An actively managed preferred share ETF from Global X (formerly Horizons). Slightly higher MER, and the active management hasn’t consistently added value.

The typical yield on these ETFs ranges from about 4.5% to 5.5%, depending on the interest rate environment. That sounds attractive, especially compared to XEQT’s roughly 2% dividend yield. But yield is only part of the story – and it’s the part that gets investors into trouble.

2. How Preferred Shares Actually Work (And Why It Matters)

Preferred shares come in several flavours, and the type matters a lot for understanding risk:

Perpetual preferred shares pay a fixed dividend forever (or until the issuer redeems them). Their price moves inversely with interest rates – when rates go up, their price drops, and vice versa. They behave a lot like long-duration bonds.

Rate-reset preferred shares have a dividend that resets every five years based on the Government of Canada 5-year bond yield plus a fixed spread. ZPR focuses on these. In theory, the rate-reset feature provides some protection against rising rates, but in practice, the resets happen infrequently and the spread is often disappointing.

Floating-rate preferred shares pay a dividend that adjusts quarterly based on short-term interest rates. These are less common in Canadian ETFs.

Here’s the crucial thing to understand: most Canadian preferred share ETFs are dominated by rate-reset preferreds. And rate-reset preferreds turned out to be far more volatile and rate-sensitive than anyone expected. When the Bank of Canada slashed rates to near zero in 2015 and again in 2020, these rate-reset preferreds got absolutely crushed – because the resets locked in much lower dividend rates than investors had been counting on.

The result? Massive capital losses that dwarfed the income these ETFs were generating. This is the trap. You buy preferred shares for the yield, but the capital losses wipe out years of dividends.

3. XEQT vs Preferred Share ETFs: Head-to-Head Comparison

Let’s put the numbers side by side.

A few things jump out immediately. First, XEQT’s MER is less than half the cost of CPD and ZPR. You’re paying a premium for the income-focused approach. Second, the preferred share ETFs are overwhelmingly concentrated in Canadian financials – you’re making a massive bet on one sector in one country. And third, preferred shares offer almost no capital growth potential. Your total return is almost entirely dependent on the dividend, which makes the fee drag even more painful.

4. Historical Performance: The Brutal Truth

This is where the preferred share story falls apart for most investors. Let’s look at what actually happened over the past decade.

Approximate total returns (price change + dividends reinvested):

(Note: XEQT launched in 2019, so longer-term returns are based on a comparable global equity portfolio like VEQT or the underlying index.)

The numbers are stark. Over the past decade, a globally diversified equity portfolio has delivered roughly 8-10% per year in total returns. Preferred share ETFs have delivered roughly 1-3% per year – even with those juicy 5% yields included.

How is that possible? Because the capital losses ate the income alive. CPD’s unit price has declined significantly from its 2014 highs. ZPR has been even worse. Investors collected their monthly dividends while watching their principal steadily erode.

A concrete example: If you invested $100,000 in CPD ten years ago, you might have collected roughly $50,000 in dividends over the decade. Sounds great. But your principal dropped by roughly $25,000-$30,000, leaving you with a total return of only $20,000-$25,000 on your $100,000 investment over ten years. That’s about a 2% annualized total return.

The same $100,000 in XEQT (or a comparable global equity ETF) would have grown to roughly $200,000-$215,000, even with its modest 2% yield. The total return gap is enormous.

Use our calculator to see how these return differences compound over your specific time horizon. The gap between 2% and 9% over 20 or 30 years is staggering.

5. The Interest Rate Trap

Understanding why preferred shares have performed so poorly requires understanding their relationship with interest rates. And this is where things get counterintuitive.

Most investors buy preferred shares because they think they’re a conservative income investment. Something between stocks and bonds. A nice, safe yield. But preferred shares are actually one of the most interest-rate-sensitive investments you can own.

Here’s what happened over the past decade:

• 2014-2015: The Bank of Canada cut rates unexpectedly. Rate-reset preferreds cratered because their dividend resets came in far lower than expected. CPD fell roughly 20%. ZPR fell roughly 25%.
• 2016-2019: Rates slowly recovered. Preferreds clawed back some losses but never fully recovered.
• 2020: COVID hit. The Bank of Canada slashed rates to near zero. Preferred shares plunged again – right alongside stocks, eliminating their supposed “defensive” benefit.
• 2022-2023: Rates finally rose aggressively. Preferred shares rallied somewhat. But by this point, investors who had held through the entire cycle had still underperformed equities by a massive margin.
• 2024-2026: The Bank of Canada began cutting rates again. And once more, preferred share prices have come under pressure.

The pattern is clear: preferred shares get hurt when rates fall, partially recover when rates rise, and never quite get back to where they started. It’s a slow-motion value destruction machine for long-term holders.

Compare this to XEQT, where rate cuts are generally positive for equities. Lower borrowing costs boost corporate profits, stimulate economic activity, and make stocks more attractive relative to fixed-income alternatives. When the Bank of Canada cuts rates, XEQT investors tend to benefit. Preferred share investors tend to suffer.

6. Tax Treatment: The One Area Where Preferreds Shine

I’ll give credit where it’s due. In a non-registered (taxable) account, preferred share dividends have a genuine tax advantage over some of the income generated by XEQT.

Preferred share dividends are classified as eligible Canadian dividends. Thanks to the dividend tax credit, eligible dividends are taxed at a significantly lower effective rate than regular income. Depending on your province and tax bracket, the effective tax rate on eligible dividends can be as low as 8-15% in lower brackets, compared to your full marginal rate on interest income.

XEQT’s distributions are a mix of:

• Canadian eligible dividends (tax-efficient – dividend tax credit applies)
• Foreign income (taxed at your full marginal rate)
• Capital gains (only 50% taxable)
• Return of capital (tax-deferred)

The foreign income component of XEQT’s distributions is less tax-efficient than preferred share dividends. And the foreign withholding tax on the underlying international holdings adds a small drag.

But here’s the critical nuance: tax efficiency only matters if the pre-tax returns are comparable. Saving 10% on taxes doesn’t help if the underlying investment returns 7% less per year. It’s like celebrating a 20% discount on something that costs three times as much as the alternative.

After-tax comparison (non-registered, 40% marginal bracket):

Even after accounting for the preferred dividend tax credit, XEQT delivers roughly three times the after-tax return. The tax advantage of preferred shares is real but far too small to close the total return gap.

Inside a TFSA or RRSP, tax treatment is irrelevant – all growth is sheltered. So the preferred share tax advantage completely disappears in registered accounts, which is where most Canadians do the bulk of their investing.

7. Volatility and Risk: Preferred Shares Are NOT Conservative

This is the biggest misconception I encounter about preferred shares. Because they have “preferred” in the name and pay a steady dividend, investors assume they’re a low-risk, conservative investment – like a bond with better tax treatment.

They’re not. Not even close.

Look at the drawdowns:

• CPD’s maximum drawdown from its 2014 peak to its 2020 trough was roughly 35-40%. That’s comparable to a stock market crash.
• ZPR’s maximum drawdown was even steeper – roughly 40-45% over the same period.
• XEQT’s maximum drawdown during the COVID crash was roughly 30-35%, and it recovered within months. Preferred shares took years.

Here’s the worst part: preferred shares gave you equity-like downside with bond-like upside. You took the same hit as stock investors during the bad times, but you didn’t participate in the massive recovery that followed. That’s the worst of both worlds.

If you want genuine stability and income with limited downside, you’re better off looking at bond ETFs, GICs, or HISA ETFs. They won’t give you the dividend tax credit, but they also won’t blow a 40% hole in your portfolio.

And if you want growth and can handle volatility, XEQT gives you the upside to justify the bumpy ride. Preferred shares give you the bumps without the upside. That’s a terrible trade.

8. Concentration Risk: A Hidden Danger

I mentioned this briefly in the comparison table, but it deserves its own section because it’s a risk that preferred share investors rarely think about.

CPD is approximately 70% financials. ZPR is approximately 65% financials.

That means when you buy a preferred share ETF, you’re making an enormous bet on the Canadian financial sector. If Canadian banks and insurance companies have a bad stretch – a credit crisis, a housing downturn, regulatory changes – your “income” portfolio is going to get hammered.

Compare that to XEQT’s diversification:

• 9,000+ stocks across 40+ countries
• Every major sector: technology, healthcare, financials, energy, consumer goods, industrials
• Geographic spread: roughly 45% US, 25% Canada, 25% international developed markets, 5% emerging markets

XEQT doesn’t eliminate risk – no investment does. But it spreads risk across the entire global economy. A bad year for Canadian banks barely registers in a portfolio of 9,000 companies.

This is similar to the concentration problem I discussed in my XEQT vs Canadian Dividend ETFs comparison. Canadian investors have a strong home-country bias, and preferred share ETFs take that bias to an extreme. You’re putting all your eggs in one sector, in one country, in one asset class that’s hypersensitive to Canadian interest rate policy.

9. Which Accounts Should Each Go In?

If you do decide to hold preferred share ETFs (I’ll get to who should in the next section), account placement matters.

TFSA

For most investors, holding XEQT in a TFSA is the optimal move. The TFSA’s tax-free growth superpower is maximized when you hold the highest-growth asset inside it. Since preferred shares have limited growth potential, putting them in a TFSA wastes your most valuable tax shelter.

Verdict: XEQT wins the TFSA slot. Don’t waste tax-free room on preferred shares.

RRSP

Inside an RRSP, all income is taxed the same when withdrawn – as regular income. The dividend tax credit doesn’t apply to RRSP withdrawals. This means preferred shares lose their one genuine advantage (tax-efficient dividends) inside an RRSP.

Additionally, XEQT’s foreign-sourced income benefits from the U.S.-Canada tax treaty inside an RRSP (reduced withholding tax on U.S. dividends), making XEQT more efficient here.

Verdict: XEQT wins the RRSP slot too. Preferred shares lose their tax edge in registered accounts.

Non-Registered Account

This is the only account type where preferred shares have a legitimate tax argument. The dividend tax credit makes preferred share income more tax-efficient than the foreign income component of XEQT’s distributions. If you’re a high-income retiree who has maxed out all registered accounts and needs tax-efficient income in a non-registered account, a small allocation to preferred shares could make sense.

But remember: the tax savings don’t compensate for the total return gap for most investors.

Verdict: Preferred shares have a niche argument here for income-focused retirees. For everyone else, XEQT’s higher total return still wins.

10. Who Should Actually Consider Preferred Share ETFs?

I’ve been pretty hard on preferred shares in this article, so let me be fair about when they might make sense:

Preferred shares might be appropriate if:

• You’re a retired investor who has maxed out TFSA and RRSP room and needs tax-efficient income from a non-registered account
• You have a high income and the dividend tax credit provides meaningful tax savings in your situation
• You understand and accept that total returns will likely be lower than equities
• You have a short time horizon (under 5 years) and are specifically looking for income, not growth
• You’re using them as a small satellite holding (5-10% of portfolio), not a core position
• You have a strong conviction on interest rates rising (rate-reset preferreds benefit from higher rates)

Preferred shares are probably NOT appropriate if:

• You’re in your 20s, 30s, 40s, or even 50s and building wealth for retirement
• Your primary accounts are TFSA and RRSP (the tax advantage doesn’t apply)
• You think “preferred” means “safe” or “conservative”
• You’re chasing the yield number without understanding total return
• You’re using them as a bond substitute
• They would make up more than 10% of your total portfolio

For the vast majority of Canadian investors – anyone focused on long-term wealth building – XEQT is the clear winner. It’s cheaper, better diversified, offers dramatically higher total returns, and requires zero expertise in interest rate forecasting.

11. What About Using Both? The Hybrid Approach

Some investors wonder if they can get the best of both worlds by holding XEQT as their core position and adding a small preferred share ETF for income.

You can. But I’d ask you to think carefully about why.

If you’re building wealth, every dollar allocated to preferred shares is a dollar that’s not compounding at equity-like rates. Over 20 years, even a 5% allocation to a 2% returning asset instead of a 9% returning asset has a meaningful cost.

A practical framework:

• Under 50, building wealth: 100% XEQT (or your preferred asset allocation ETF). No preferred shares needed.
• 50-65, transitioning to retirement: Consider adding some fixed income, but bond ETFs are a better choice than preferreds for stability.
• 65+, drawing income, non-registered account: A small allocation (5-10%) to CPD or ZPR could make sense for tax-efficient income alongside your XEQT core.

If you’re in that last category, keep the allocation small, understand that you’re trading total return for tax efficiency, and don’t fall into the trap of increasing your preferred share allocation just because the yield looks attractive.

12. The Verdict: For Most Canadians, XEQT Is the Clear Winner

Let me bring this full circle with my uncle’s story. He bought CPD because it seemed like the smart move – higher income, tax-efficient dividends, a “safer” alternative to stocks. But the reality was years of disappointing total returns, capital losses that offset the income, and the constant stress of watching his position erode every time the Bank of Canada adjusted rates.

He eventually sold his CPD position and moved the proceeds into XEQT. His exact words? “I wish someone had shown me the total return numbers before I bought it.”

Here’s the bottom line:

XEQT wins for:

• Long-term wealth building (any time horizon over 5 years)
• TFSA and RRSP investing
• Diversification across sectors and geographies
• Lower fees (0.20% vs 0.45-0.50%)
• Total return (dramatically higher over any meaningful period)
• Simplicity (one ticker, globally diversified, auto-pilot investing)

Preferred share ETFs offer:

• Higher current yield (~5% vs ~2%)
• Tax-efficient eligible dividends in non-registered accounts
• Monthly distributions (for investors who prefer frequent income)

But the higher yield comes at a steep price: limited capital appreciation, significant interest rate risk, massive sector concentration, fees more than double XEQT’s, and a decade of total returns that would embarrass a savings account.

For most Canadian investors – especially those in their wealth-building years – the choice is clear. Buy XEQT, automate your contributions, and let the global economy compound your wealth. Preferred shares are a niche tool for a specific situation. They’re not the cornerstone of a portfolio. And they’re certainly not a substitute for real equity exposure.

Your future self will thank you for choosing growth over yield.

Related Reading

• What Is XEQT?
• XEQT vs Canadian Dividend ETFs: Why Total Return Beats Yield Chasing
• XEQT vs Bond ETFs: Do You Need Bonds?
• XEQT in a TFSA vs RRSP: Where Should You Hold It?
• XEQT MER Explained
• Investment Growth Calculator