[james4beach]

I saw an interesting press release from Horizons ETFs

Horizons HSAV surpasses $1 billion in assets

HSAV invests the money into bank accounts, so it's like PSA, except HSAV exploits a tax loophole to turn interest income into capital gains.

Horizons is saying they will suspend subscriptions, which means they won't create new shares if buying continues. This means it will start trading at a premium to NAV. They have put out a statement to discourage people from buying, telling them to NOT buy more shares above $1.5 billion:

At this time, Horizons ETFs has determined that it will be suspending subscriptions for new shares of HSAV when its AUM exceeds $1.5 billion. In the Manager’s view, this suspension, if it occurs, will ensure that HSAV will continue to achieve its investment objectives.
. . .
During any suspension, investors are strongly discouraged from purchasing shares of HSAV.

What do you think this means? Is Horizons worrying that they're pushing their luck on their tax loophole, or could it be that they have exhausted the options for bank deposits in Canada which have any positive yield?

It's unheard of for a successful ETF to actively refuse taking more money, so there must be something interesting going on here.

 

[Beaver101]

^ First time I have seen this product, a PSA that doesn't pay an income distribution so it's interesting ... my "guess" on the subscription suspension after the $1.5B mark is ... the fund will become unsustainable. The NAV will take a reversal and subsequently not meet its objectivity even with its cheap MER.

Just a quick and simplified calc. here. I'm looking at its price atm $100.79 (not guaranteed) ... pay MER of .08% meaning a return of .71% whilst the best (1 year GIC) I see atm is .70% ... a difference of .01% gain (and ignoring a commission payable to purchase). I don't suppose someone who purchases this ETF would only hold it for a year?

 

[Covariance]

Quite interesting. For those with more experience in these matters a couple of questions;
1. When they stop creating new shares - does it continue to trade? Does this action effect an investor's liquidity?
2. The documents on their website indicate it is a corporate structure versus a trust - how would that factor into the evolution of this?
3. It is not government guaranteed as a deposit product or high yield savings vehicle would be. Consequently isn't it better to value this with a discount to deposit rates to reflect?

 

[Eclectic12]

As long as the listing requirements are met - there's no reason I know of that it would stop trading.

As for a corporate structure, my understanding is that that's what's required to be able to use swaps. I assume that it's swaps that are turning the interest income into capital gains.


Cheers

 

[Covariance]

As for a corporate structure, my understanding is that that's what's required to be able to use swaps. I assume that it's swaps that are turning the interest income into capital gains.

From what I read on their website it is not swaps. It is "...primarily in high interest deposit accounts with Canadian banks" and holdings show 100% cash. There are no distributions so the interest income net of expenses accumulates and hence drives the capital gain.

 

[james4beach]

As long as the listing requirements are met - there's no reason I know of that it would stop trading.

Yeah I think it would keep trading and then go to a premium to NAV, if people kept buying shares. That means people would be overpaying for cash, which is probably a dumb thing to do.

As for a corporate structure, my understanding is that that's what's required to be able to use swaps. I assume that it's swaps that are turning the interest income into capital gains.

I think Horizons actually changed methods recently, which is how they ended up with corporate class shares. They adjusted their tax avoidance method to adapt to new regulations that were closing loopholes. What a fun game!

Tax changes lead Horizons to propose converting ETFs to corporate-class funds | Investment Executive

Reorganization is in response to draft legislation that will implement changes to the "allocation to redeemers" rules

www.investmentexecutive.com

August 23, 2019​

Toronto-based Horizons ETFs Management (Canada) Inc. has proposed merging 44 synthetic ETFs into a corporate-class structure in order to maintain the funds’ tax characteristics.​

​

This would mark the first time that investments of this structure would be offered by Horizons.​

​

The synthetic ETFs primarily use derivative arrangements to achieve their investment objectives — a methodology the Department of Finance targeted in its 2019 federal budget.​

​

The 2019 budget proposed to disallow allocations of ordinary income to redeeming unitholders if the unitholders’ redemption proceeds are reduced by the allocation. This would apply to all mutual fund trusts for tax years beginning after March 18, 2019. The Department of Finance confirmed these intentions by releasing draft legislation on July 30.​

​

Had the synthetic ETFs continued to operate as normal after the 2019 tax year, doing so could have resulted “in taxable distributions to the unitholders of the ETFs in respect of periods after their 2019 taxation years,” Horizons said in a release from March.​

​

 

[james4beach]

2. The documents on their website indicate it is a corporate structure versus a trust - how would that factor into the evolution of this?

See article I linked above. I think there is "regulatory risk" in all of these Horizons ETFs, because they are using tax avoidance techniques. They've been playing a cat-and-mouse game with the government, and I'm not sure that's a great idea.

Personally I believe that Horizons is violating the spirit of tax law.

I prefer to invest in things where I can sleep at night knowing that they aren't skirting laws and regulations. I don't want to wake up one morning and find that one of my long term ETF holdings is about to be nailed by changes in the law. So you might want to factor that in when comparing your options.

3. It is not government guaranteed as a deposit product or high yield savings vehicle would be. Consequently isn't it better to value this with a discount to deposit rates to reflect?

Right, these are not CDIC guaranteed. There is no deposit insurance at all, unlike with credit unions or regular bank deposits. And I agree that it's worth taking that into account.

 

[Beaver101]

^ But the inception of HSAV's was Februrary 5, 2020 with its prospectus (issued?)/dated August 26, 2020 so I would find Horizon would be that dumb to sell such a product knowing after the fact (aka there'll upcoming changes to the taxation of such funds since August 23 2019, your link).

Or there is the possibility that they (or us?) are that dumb to sell to the unsuspecting investor ... especially how big that ETF has grown in such a short span of time.

 

[Covariance]

^ ...Horizon would be that dumb to sell such a product knowing after the fact (aka there'll upcoming changes to the taxation of such funds ...

They most likely believe they are fine. Until they are told they are not. Up to the investor to decide if it’s a risk worth taking.

 

[james4beach]

They most likely believe they are fine. Until they are told they are not. Up to the investor to decide if it’s a risk worth taking.

Right, what they are doing is legal. I'm not saying it's illegal, but there are people out there who think it violates the spirit of tax law.

I doubt the investor is at too much risk since changes to tax law are announced in advance, so there would be plenty of time to adjust and sell the position if you need to.