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Thoughts on swap-based ETFs in taxable acct

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  • Mar 26th, 2017 1:49 pm
[OP]
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Nov 16, 2003
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Thoughts on swap-based ETFs in taxable acct

I am considering putting a couch-potato style portfolio together (passive ETF investment portfolio) and I'm looking at all the ETFs available to me. Swap-based products caught my eye because of the seeming tax-efficiency of them; specifically Horizons products. I'm not sure if iShares, BMO, Vanguard, etc. have similar products. I was looking at:
HBB - CAD Bond
HXT - S&P/TSX 60 (CAD equity)
HXS - S&P 500 (US equity)
HXX - Euro STOXX 50
The only thing missing is a Far East and Asia swap-based ETF, so I'd look at another company, for that (any suggestions?). I'd also want to put something into a REIT or other Real Estate ETF (any suggestions?)

I'm looking at swap-based products to help simplify calculation of my Adjusted Cost Base (since there are few if any distributions) and tax would be deferred until units are sold, and all growth is considered capital gains as opposed to income (again because there are few if any distributions). So to me, even though the fees are slightly higher than their competition the savings in terms of saved taxes should outweigh the fees.

I was wondering what RFDers thoughts were on swap-based products. And specifically, what are your thoughts on the portfolio shown above?

Thank you,
"A proof is a proof. What kind of a proof? It's a proof. A proof is a proof. And when you have a good proof, it's because it's proven."
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32 replies
Deal Addict
Oct 4, 2009
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Montreal
No other ETF provider in Canada offers them. Swap based ETFs are popular in Europe.

I'd forget HXX(too narrow) and hold EAFE and EM in your registered accounts if possible. Once you include the swap fees these ETFs are more than just slightly more expensive(HXT excluded). You are also adding credit risk and regulatory risk to your portfolio.

As long as you understand these issues and are ok with them, swap based products can be good options when your portfolio is significantly larger than your registered space.
Deal Addict
May 22, 2003
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Didn't even know HXX existed. I'm currently using HBB, HXS, HXT and XEF in my corporate trading account.
[OP]
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Nov 16, 2003
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I agree that HXX is small (only 50 European companies), so diversification is an issue. But supposedly they are the 50 biggest companies in Europe and spread out in terms of sectors. But another hit against HXX is that it's new, less than a year old and I'm not sure about liquidity, nor longevity and I typically like to only put money into things that have been around for a while.

I think the counterparty risk is minimal given we are talking about National Bank in this case. And I am hoping that the tax savings will outweigh the higher fees.

Comments, and suggestions are much appreciated, thank you.
"A proof is a proof. What kind of a proof? It's a proof. A proof is a proof. And when you have a good proof, it's because it's proven."
-- Jean Chretien
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Feb 29, 2008
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I use hxt hbb and hxs. For international I use CIBCs index fund.
[OP]
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Nov 16, 2003
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Can you confirm that HXT, HBB, and HXS give no distributions? That makes calculating Adjusted Cost Base a little easier.
Also, how are gains shown? Is it a change to NAV?
"A proof is a proof. What kind of a proof? It's a proof. A proof is a proof. And when you have a good proof, it's because it's proven."
-- Jean Chretien
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None of those ETFs have ever had a distribution nor do they ever intend to if you read their documents. Gains are incorporated in the unit price.

Suggest you read the various docs available for each ETF. You should understand these products before purchasing.

Easier ACB tracking is a nice side benefit but certainly not a valid reason on its own for purchasing these instruments that come with higher costs and added risks.
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Jul 10, 2007
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Can someone explain why on certain days, the S&P can be positive, but HXS is negative or vice versa? Today would be an example of that.
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Jan 14, 2009
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golfcraze wrote:
Mar 15th, 2017 3:18 pm
Can someone explain why on certain days, the S&P can be positive, but HXS is negative or vice versa? Today would be an example of that.
HXS is unhedged and the USD declined relative to the CAD. Basically foreign exchange loss. It has nothing to do with HXS being swap based. For example XUS declined too. There was a massive currency adjustment due to Yellen's accommodaitive stance this morning. On most days you wouldn't see such a large difference.
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Indeed, you must account for the currency movement on top of the S&P's.

When it was launched HXS was initially a hedged product but its mandate was later changed to be unhedged. Late last year HSH was launched to take up that space, it should hug S&P movements.
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zakarydoks wrote:
Mar 15th, 2017 3:28 pm
HXS is unhedged and the USD declined relative to the CAD. Basically foreign exchange loss. It has nothing to do with HXS being swap based. For example XUS declined too. There was a massive currency adjustment due to Yellen's accommodaitive stance this morning. On most days you wouldn't see such a large difference.
Thanks for this explanation, I was wondering this as well.
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Jun 3, 2009
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S5 wrote:
Feb 6th, 2017 6:27 pm
No other ETF provider in Canada offers them. Swap based ETFs are popular in Europe.

I'd forget HXX(too narrow) and hold EAFE and EM in your registered accounts if possible. Once you include the swap fees these ETFs are more than just slightly more expensive(HXT excluded). You are also adding credit risk and regulatory risk to your portfolio.

As long as you understand these issues and are ok with them, swap based products can be good options when your portfolio is significantly larger than your registered space.
Can you elaborate a bit more on that? Thanks.
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Oct 4, 2009
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The ETFs do not own shares in the index they are following. Instead they engage a counterparty in a swap agreement. If the counterparty were to go bankrupt or not be in a position to meet its obligations any amount owed to the ETF at that point would not get paid. Canadian regulations don't allow either party to owe the other more than 10% so only that part should be at risk. Moreover the likelihood that a bank would fail in a rising market seems very low. A counterparty failing during a market collapse is not an issue as the ETF would be owing.

More likely is regulatory risk, the government could decide to outlaw these products at any point in time on a whim as they've done with other ones. That would likely lead to shareholders realizing capital gains much earlier than they planned and could lead to some ugly tax consequences.
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May 31, 2007
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I think the risks are overstated. CPP never seemed to be a fan of these products and blew the risk out of proportion with his posts. National Bank is not going bankrupt. If they did, you think the gov is going to let a big bank die? If that's the case, you have A LOT more to worry about then your ETFS... LOL

These products are fine, the risk is extremely low (almost non-existent) and often track the benchmark better then non-counterparts ETFS. Liquidity is there now, these products are here to stay.

The government is more interested in increasing capital gains, dividend tax, and cracking down on doctors corperations, home office write offs and taxing secondary RE properties.
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May 28, 2007
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S5 wrote:
Feb 12th, 2017 9:33 am
None of those ETFs have ever had a distribution nor do they ever intend to if you read their documents. Gains are incorporated in the unit price.

Suggest you read the various docs available for each ETF. You should understand these products before purchasing.

Easier ACB tracking is a nice side benefit but certainly not a valid reason on its own for purchasing these instruments that come with higher costs and added risks.
Can't I just use the average cost per share/unit that's stated in my trading account statement online as the cost of acquisition when I decide to sell? Isn't this the ACB? If it is, then it makes life easier when reporting capital gains and losses because the bank or brokerage company has already done the calculations for you.
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