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Discussion Starter · #1 ·
ZDB evidently is populated mainly with discounted bonds versus VSB which is evidently populated mainly with premium bonds. Can one of our tax gurus give a simple explanation of how these two bond types create a differential in tax 'efficiency' in these funds?
 

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Larry: I'm not sure of the answer to your question for HBB. I can't find a list of its holdings. My question arose from an article in Money Sense that compared ZDB and VSB as to their 'tax efficiency'. Evidently the bonds in ZDB are mainly discounted bonds and have favourable tax treatment in unregistered funds. However, the premium bonds in VSB evidently are taxed differently and are more suitable for registered funds. I was looking for an explanation as to the 'why' of it.
 

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This is an interesting bond ETF, for non-registered accounts. While I agree HBB is interesting too, it's a derivative-based ETF... it does not actually contain any bonds, and incurs some counter-party risk.

ZDB is the traditional type of bond ETF, which actually contains the bonds. Credit quality and liquidity also looks good. They are doing the same thing that I do for my non-reg bond holdings: they seek low coupon bonds. It's a good idea and is the correct non-reg tax optimization.

Here's a recent article on this, Don’t discount ZDB just yet. He compared 2015 returns, notably the after-tax return:
ZDB 2.52%
VAB 1.91%
ZAG 1.61%
XBB 1.39%

That's a pretty significant tax advantage for ZDB, without resorting to exotic derivative structures like HBB. I'm intrigued by this one even more than HBB.

By the way, for holding fixed income non-registered, you might just be better off going with GICs, as per
http://www.canadianportfoliomanagerblog.com/hbb-vs-gics/
http://canadiancouchpotato.com/2014/02/13/new-tax-efficient-etfs-from-bmo/
 

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Personally, my ranking for fixed income non-registered goes something like this

1. GICs by far, since they're simple, risk-free, and easiest tax reporting (T5 slip)
2. Individual low coupon govt bonds, also risk-free
3. ZDB ; non-registered it's definitely a better version of XBB or ZAG
4. HBB ; total return is great but I generally avoid exotic derivatives ETFs

The BMO tax parameters document is pretty neat to see. ZAG and ZDB are side by side. You can see that they have nearly the same total distribution, but ZDB has far less taxable interest income, and instead has capital gains -- perfect. A great illustration of the strategy's benefit.
 

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I spent some time studying ZDB, and read the last two years' financial statements. It looks pretty good to me, with sensible holdings and good credit quality, and really does carry low coupon bonds -- these generate minimal interest income compared to other bond funds. I can verify the tax efficiency of their holdings. The only downside I see to ZDB is their rather high level of securities lending (humble and I think this is a danger, but many others don't care about this).

On my advice, my family purchased $80k of this for non-registered. Liquidity is not great but the market maker still gave us a decent fill... I was 98% of today's volume ;)
 
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