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larry u are funny!

have the folks at PWL convinced you to go all couchy-potato?
whatever happened to the son of Suncor?
 

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We're looking at a management fee of 0.15%, a swap fee of 0.15% and possible counterparty hedging expense of 0.0 to 0.1%. They seem to be trying to skirt the ruling that caused other 'tax-efficient' ETFs such as CAB and CSD to lose their ability to recharacterize income as capital gains or return of capital by not paying any regular distributions.

I don't know what the index characteristics are, but if we compare to one of the cheaper bond ETFs in Canada, CAB, with its management fee of 0.12%, we're looking at an incremental fee of 18 - 28 bpp. The tax benefit of the recharacterization of income as deferred capital gains with CAB's coupon of 3.46% is about 50% of 3.46% = 1.73% times your marginal tax rate for income. At ~45% depending on the jurisdiction, that's 0.78% in tax savings. Even better than that, though, is that the fund compounds before tax, and the gain is taxable only when sold.

With today's low rates, this fund is 'just okay'. If/when rates rise, though, this could be very helpful.
 

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Discussion Starter · #4 ·
humble_pie, most of my assets are in a passive portfolio.

Suncor gamble was part of my 'play money', some call it 'core and explore'. I sold last year.

edit: lol @ 'the son of suncor' ;)
 

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Discussion Starter · #5 ·
andrewf nice comment.

A part from the tax saving, like you said what scare me of swap based ETF is the potential of CRA coming after the missing return. But its nice to see more and more fixed income ETF targeted at taxable investor:

BXF - First Asset DEX 1-5 Year Laddered Government Strip Bond Index ETF
ZDB - BMO Discount Bond Index ETF
HBB - Horizon Canadian Select Universe Bond ETF
 

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If CRA goes after HBB, they are also going to go after other existing funds like HXT and HXS, which are operated on the same principle. Not to mention all the many billions of dollars of existing swap arrangements between institutions. I think the problem with CAB, etc. was that they were making distributions.

I'm not especially concerned about counterparty risk, given the nature of the swaps Horizon uses.
 

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Since I don't want to pay more taxes right now and for a couple of more years, this ETF will be great for my non-registered account. I already own HXS and HXT.
 

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Even if you wanted to generate a stream of income from this ETF, the taxation is considerably more favourable. If you were to sell an equivalent fraction of your holding in the ETF as the yield/distribution of the index, it would start off as almost entirely 'return of capital' with a small amount of capital gains, with the fraction being counted as capital gain rising over time. So not only is the 'other income' converted to a capital gain, most of that gain is deferred until much later. It also neatly avoids the problem with premium bonds, where the coupon rate is higher than the YTM, which hurts the tax efficiency of traditional bond funds significantly.
 

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So this is a bond ETF that pays no distributions at all.

Just like the tax-advantaged bond funds before it, I think this ETF is trying to use cute derivatives games to evade taxes on a technicality. Fundmentally, interest income should be taxed. Think of zero coupon bonds... those don't pay coupons either, but they are still taxed (one pays tax on virtual interest being accrued).

I don't think CRA will let them get away with this. Maybe for a year or five, but how long? I agree it sounds tax efficient for now, though.

Personally I don't buy any ETF until it's been around long enough that I can see audited annual financial statements. I mean with interest rates this low anyway, who cares, everything rounds to zero with or without taxes.
 

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I don't know. I think this is the only way I would be willing to own premium bonds in a taxable account.

And I'm not sure how easily CRA could separate this fund from all the other total return swap ETFs. Why does interest income get special treatment vs dividend and foreign income from HXT and HXS? And attacking the tax treatment of total return swaps is a bigger can of worms, with potential double taxation on both sides of the swap.
 

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Discussion Starter · #13 ·
bump

just noticed today that HBB is now at 135M$ of asset under management while BMO ZDB felt below 30M$ !
 

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Hello money peeps:
A question from a soon-to-be rookie DIY investor. I have $200K that needs to go into a bond ETF (unregistered). Should I be looking at VAB, or more risky (?) HBB? The risks are that CRA will change rules and I may have a tax bill coming? And that the underlying products might not be as secure?
Thanks in advance for any advice.
Linda.

PS; should have added; I am 55, hoping to retire at 60.
 

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I doubt there is much real risk of a change in tax status. It likely wouldn't be retroactive, as that would be a nightmare to sort out. Worst case would be the closure of the fund, triggering a capital gain, which would still be far less taxation than paying interest on the coupons from premium bonds. Premium bond funds like VAB are a disaster in taxable accounts.
 

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Thank you Andrew.
If a person were to put some (all?) of his/her fixed income allocation into HBB, I have read in another thread, that instead of the traditional bonds-into-registered accounts, one might put equities into the registered accounts, and have this HBB as a taxable item. Is anyone doing this?
Linda.
 

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Thanks for keeping this thread alive. I was interested in this but wanted to revisit it after it has some track record.

(2015-06-15) just noticed today that HBB is now at 135M$ of asset under management
And today it's $169 million assets, another 25% growth in assets in just 6 months. So it definitely keeps attracting funds.

Wow, this is magical. It performs exactly like XBB. In this chart, HBB is green and XBB is blue. The blue line for XBB is adjusted for distributions, so you're seeing XBB total return. And HBB in green has no distributions, so it's intrinsically total return.

Look at this beauty. WOW:
http://stockcharts.com/h-sc/ui?s=HBB.TO&p=D&yr=1&mn=6&dy=0&id=p08059844179

I would hold this non-registered, which produces no distributions and only a final capital gain/loss. Unfortunately due to being subject US tax law, I can't hold Canadian ETFs non-registered. Sigh. How frustrating
 

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The swap counterparty is National Bank of Canada, right?

As I understand it, the risk of the swap has to do with the incremental total return offered. So if National Bank collapses, the current period's return may not materialize but the bulk of the HBB value would still be safe. Is that how others understand the risk?
 

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The swap counterparty is National Bank of Canada, right?

As I understand it, the risk of the swap has to do with the incremental total return offered. So if National Bank collapses, the current period's return may not materialize but the bulk of the HBB value would still be safe. Is that how others understand the risk?

Can you explain this further? What do you mean by 'current period's return'?

I also hold HBB (and HXT, HXS) and I worry about counter party risk.
 

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The swap counterparty is National Bank of Canada, right?

As I understand it, the risk of the swap has to do with the incremental total return offered. So if National Bank collapses, the current period's return may not materialize but the bulk of the HBB value would still be safe. Is that how others understand the risk?
http://canadiancouchpotato.com/2011/10/24/etf-risks-in-perspective-synthetic-etfs/
From the above CCP link:
Under Canadian mutual fund regulations, counterparty exposure cannot exceed 10% of a fund’s assets. This means that even if the counterparty did fail, the worst-case scenario is that an investor would recover 90% of the index’s current value.
Also:
http://canadiancouchpotato.com/2011/06/06/understanding-swap-based-etfs/
http://canadiancouchpotato.com/2011/06/08/swap-based-etfs-what-are-the-risks/

I used to own HXT. Sold it at the end of last year's dismal results in the TSX and replaced it with ZCN because I am approaching a life stage where I prefer ETF distributions over deferred capital gains. Something to consider if you are anywhere near the portfolio withdrawal phase of your investing lifecycle. :smilet-digitalpoint
 
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