Roberts Nash Advisory Group

Horizons - Total Return index ETFs

The world of Exchange Traded Funds (ETFs) continues to expand in Canada as the number of providers and the number of funds increases monthly. For investors this brings greater selection and in some cases lower fees. However, as providers continue to launch products to fill every possible investment need, it increases the number of ETFs available to the investor. This oversupply creates confusion regarding which options are best and requires investors to constantly re-evaluate holdings that they currently have in place.

The Roberts Nash Advisory Group believes that ETFs are an important tool for proper portfolio construction. They can be a low cost way to gain well diversified market exposure.  For many investors, this a way to maintain weightings in equities and bonds offering a higher return potential without significantly raising their overall risk profile.

On July 13th National Bank Financials’ ETF Research and Strategy Team published a report highlighting a selection of Horizons ETFs currently used by our team for portfolio construction. The piece offers great detail regarding the benefits of using these options versus other offerings. We would like to highlight three ETFs in particular – Horizons Canadian Select Universe Bond (HBB); Horizons S&P TSX 60 Index ETF (HXT); and Horizons S&P 500 (HXS).  Full access to this report is linked below. The short notes:

Horizons launched a new ETF structure in 2010 called Total Return Index ETFs (TRI ETFs). These offer exposure to an asset class by entering into derivative contracts to gain their exposures versus traditional or “physical” ETFs which directly hold underlying securities. The structure has proven to provide almost no tracking error (aside from the MER); operates with exceptional tax efficiency; and is able to keep its costs well below those of competitors.

  • Horizons S&P TSX 60 Index ETF (HXT) cut its Management Expense Ratio (MER) to 0.03% in 2015, maintaining its position as the lowest-fee ETF in Canada.

  • Horizons Canadian Select Universe Bond (HBB) has proven to be an extremely efficient way for investors to gain a conservative bond exposure in non-registered accounts. The TRI structure means there are no distributions, but in taxable accounts this works defer the interest income as a future capital gain. The MER comes in at 0.17%, but this becomes 0.32% when the swap fee and taxes are included.

Full definitions of all terms and illustrations of “tracking error”, “benefits from income deferral” and the TRI ETF Swap-based structure can be found in the full report and available on request.

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** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **

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