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The ETF is designed to track the DLUX Capped Bond Index, a high-quality subset of the DEX Universe Bond Index, and to make distributions at least quarterly in the form of tax-advantaged capital gains.

This will be accomplished by investing the ETF in a portfolio of Canadian equity securities. The equities will be sold via a forward agreement to a counter-party, in return for a purchase price that provides exposure to the performance of the DLUX Capped Bond Index. As a result of these transactions, the ETF distributions are expected to be treated as capital gains. -Morningstar
'expected' to be treated as capital gains... As long as that happens then I see it as a creative way at getting exposure to a high quality bond index with more tax-efficient distributions.
 

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this is at least the 3rd bond instrument with tweaked taxable distributions in canada in recent months. Already trading are the Marret high yield bond fund MHY.UN, with most of the distribution taxed as return of capital. And Onex' OCP credit strategy fund, OCS.UN, again with distribution to be taxed as return of capital, debuted last week.

and there are others with various kinds of beneficial taxation profiles.

but. It's been less than a year since we all squeaked past death-by-global-depression. Here's a darker aspect of the countless funds - and more are proliferating every week - that hold nothing but swaps, futures & certain derivatives in order to generate tax-favoured distributions or gain leverage.

problems are related to the fact that everything is dependent upon the counterparty. In organized options exchanges, the clearing corporation itself acts as the ultimate counterparty, thus guaranteeing to broker-members that shares will be delivered & monies paid upon exercise. However, in the unorganized futures markets broadly speaking it is each individual counterparty that "guarantees" continuity. If a counterparty fails then the fund itself fails. Think Long Term Capital. Famously, LTC collapsed because its counterparty failed.

nobody has a clue what ratio of derivatives-to-underlyings global markets can support, or how fast many derivative instruments could topple if a major one blows. These funds seem fine at the present time. But i for one would never retire to shangri-la & bliss out.

it's both safer & more profitable to trade these things rather than owning them long-term imho. Their distributions typically swing by an amount that's far greater than the scheduled payouts. A fast skater can score these goals, and also get off the ice if another global market rout occurs.
 

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This is not really 'creative'. The same structure has been used in closed-end funds for at least 5 years

Yes, you have counter-party risk, but after last year I have noticed that managers of these funds are disclosing their counter-parties, and making sure they are really solid. Take care that you are not mislead by some subsidiary of (say) TD with a name like 'T-D Assets'. This subsidiary may not have any assets in it.

Your security for the swap of portfolios is the value of the Cdn portfolio that is created with you investors' cash and retained full ownership. If you get worried compare the value of the two portfolios.

Also check the management fees. With the closed-ended fund these are really high because you are paying for the management of TWO fund (if the derivative is actually backed by a fund.
 

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this is at least the 3rd bond instrument with tweaked taxable distributions in canada in recent months. Already trading are the Marret high yield bond fund MHY.UN, with most of the distribution taxed as return of capital. And Onex' OCP credit strategy fund, OCS.UN, again with distribution to be taxed as return of capital, debuted last week.
I may be missing something about these types of instruments, however, if "most of the distribution" is RoC, there isn't any real return, correct?
RoC is like giving you your money back (in case of funds or trusts, it's really distributing to existing unit holders with new incoming contributions).
And if that's most of the distributions, isn't that like a Ponzi scheme?
Show me the real moolah....
 

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The change in value of the underlying derivative creates an accrued gain. If that is paid out before being actually 'realized' by a sale, then it would be considered ROC for tax purposes. Resulting in no net reduction in value of the holding. (Div net of Gains).

Distributions may be made without either realized or accrued gains. In that case, too, the distribution would be ROC. Resulting in net reduction in value of holdings .

The distributions from these types of funds may be pre-set (regardless of accrued or even actual gains/loss) or may vary with the earned/accrued gains/losses. Most are the former because retail investors are too lazy to appreciate the difference.
 
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