Both have gone through a difficult period but the worst is behind them and there should be good profits ahead.

Exchange-traded funds (ETFs) are becoming increasingly popular in Canada. In fact, they are growing much faster than traditional mutual funds in terms of assets under management, albeit from a much smaller base.

Until recently, Barclays Global Investors Canada had the field pretty much to itself in terms of domestic issues. But a new player has emerged, Claymore Investments, which is a subsidiary of a U.S. company with the same name.

Some of the Claymore funds look very interesting and this month I recommended a new one to readers of my Mutual Funds Update newsletter. It's the Claymore S&P/TSX CDN Preferred Share ETF, which trades on the TSX under the symbol CPD.

Preferred shares have gone through a rough period but I think the worst is over and that this fund offers the potential for both cash flow and capital gains going forward.

The fund tracks the performance of the S&P/TSX Preferred Share Index, net of expenses. Launched in 2007, it got off to a bad start losing more than 17% last year. But keep in mind that 2008 was the worst year for preferreds in living memory and that a loss of that magnitude is unlikely to occur again for a long time, if ever. So far in 2009, the fund is ahead 14.2% (to June 1) and I think there is a lot more profit potential here.

The portfolio is heavily weighted to preferred shares issued by banks and insurance companies, which comprise more than 80% of the assets. Major holdings include issues from Great-West Life, CIBC, Royal Bank, IGM Financial, and TD Bank so the quality of the securities is excellent.

The fund pays quarterly distributions with the most recent being 21c a share, which was paid in April. This amount is consistent with past payments. In 2008, all of the distributions were tax-advantaged with 87% being eligible for the dividend tax credit and the rest treated as return of capital.

The units closed on June 9 at $16.03. Assuming distributions are maintained at close to the April level, the projected one-year yield is 5.2%. If you need income be sure to specify at the time of purchase that you want your payments in cash, otherwise they may be automatically reinvested. The management fee is 0.45%.

Previously, I recommended the Claymore Dividend & Income Achievers ETF (TSX: CDZ) to our readers. It took a hit in the market drop last fall but is recovering strongly. This ETF posted an advance of 9% in the three months to April 30 as banks and other financial sector stocks rallied strongly when it became apparent we were not heading for a total meltdown. The ETF invests in a portfolio of dividend-paying stocks. Just over half of the assets are in financial issues, with 14% in energy and the rest widely distributed.

Since ETFs trade on the TSX, you'll need to place your order through a broker. To make the trade as cheap as possible, you may want to use a discount broker for this purpose.

For information on Gordon Pape's Mutual Funds Update newsletter, go to http://www.buildingwealth.ca/Bookstore/ProductDetail.cfm?Product_ID=80