HBB - Horizon Canadian Select Universe Bond ETF

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larry81
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HBB - Horizon Canadian Select Universe Bond ETF

Post by larry81 »

It seem that horizon is preparing tu launch a new tax-efficient bond ETF (HBB):

http://www.horizonsetfs.com/Pdf/Prospec ... pectus.pdf
Horizons HBB seeks to replicate, to the extent possible, the performance of the Solactive Canadian Select Universe Bond Index (Total Return), net of expenses. The Solactive Canadian Select Universe Bond Index (Total Return) is designed to measure the performance of the Canadian investment-grade fixed income market.

Each of the ETFs have entered into or will enter into a Swap with a Counterparty or Counterparties pursuant to which the ETFs each gain exposure to its Underlying Index. Each Swap is or will be a total return swap (which expression shall include a price return swap that results in the receipt of a total return) under which the ETFs will pay the Counterparty or Counterparties a floating amount based on prevailing short-term market interest rates and an equity amount based upon any negative return of the applicable Underlying Index and, in return, the Counterparty or Counterparties will pay the ETFs an equity amount based upon any positive return of the applicable Underlying Index. The ETFs also each intend to invest the net proceeds of Unit subscriptions in cash and short-term debt obligations to earn prevailing short-term market interest rates
Horizons HBB will pay an annual Management Fee to the Manager equal to 0.15% of the net asset value of Horizons HBB, together with applicable Sales Tax.
:)
Last edited by larry81 on 28 Apr 2014 10:17, edited 1 time in total.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by larry81 »

The ETFs will not make regular distributions. An ETF will, only when necessary, distribute income in the form of a distribution reinvested into Units of the ETF at the end of a calendar year. Such reinvested Units will then be consolidated so that the number of Units held by an investor after such a distribution will be equal to the number of Units they held the moment before the distribution.
A bond ETF with no distribution, it seem to be the holy grail for investor in the accumulation stage without need for income. I know that the swap structure is quite common but i am wondering if there any possibility that the CRA will on similar ETF, like they did with advantaged bonds...
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by Peculiar_Investor »

A new ETF, based on a new index flashes a caution to me. Using Google I found Solactive Canadian Select Universe Bond Index | Solactive AG and under Documents found this PDF, Solactive Canadian Select Bond Index Family where the index manager states:
Solactive wrote:1.2 Initial Values and History

The indices are calculated every Business Day which started on the 24th of February 2014. All indices (except for the Solactive Canadian Select Short Term Bond PR Index and the Solactive Canadian Select Short Term Bond Index) began with a value of 1000 as of the close of trading on 24th of February 2014.

Two years of back tested history is available beginning Jan 1st, 2012.
There are a number of time testing fixed income benchmarks in Canada. Obviously Horizon is later to the ETF game and existing benchmark indices are probably already licenced to other ETF providers.

I'd pass on this one until such time as track record has been established, particular one that spans at least one business cycle. Backtesting two years doesn't give me comfort, particularly with the US Fed actions in the marketplace and their impacts. I would think that most would concede that the past two years have not been a fully representative sample of the fixed income market. Buyer be informed and aware IMHO.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by Thanh »

I'm sure the CRA will look at this very shortly.

With HXT, it converts dividends into capital gains. The thing is that if we exclude the impact of tax deferral through time, for most Canadian investors, dividends are more tax-effective than capital gains so the CRA is losing some money from investors while making more for other investors. But for bonds, it converts income that is fully taxable to capital gains which are more tax-efficient. If you add tax defferal on top of that, we can expect the CRA to be all over this.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by gsp_ »

Thanh wrote:I'm sure the CRA will look at this very shortly.

With HXT, it converts dividends into capital gains. The thing is that if we exclude the impact of tax deferral through time, for most Canadian investors, dividends are more tax-effective than capital gains so the CRA is losing some money from investors while making more for other investors.
I would argue that most Canadian investors' tax situation doesn't matter. What matters is the asset weighted MTR of investors in those products and that is likely to reflect higher* dividend than capital gain tax rates. Alberta is the exception but tax deferral overcomes even it.

Don't feel qualified to offer an opinion on your broader point of regulatory risk.

Thanks to larry81 for bringing this interesting new product to our attention.


* Quick perusal of taxtips.ca shows this occuring as early as 44k in QC and as late as 136k in NL with ON at 83k.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by larry81 »

Thanh wrote:I'm sure the CRA will look at this very shortly.
I share your concerns, even if HBB is a perfect fit for my portfolio and personal tax situation. I cant see how CRA could let simply stand still and lets all this potential tax revenue go away.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by gsp_ »

As pointed out by CCP, similarly to HXS, there's a .15% swap fee. That should bring the MER to .33%-.35% after taxes.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by larry81 »

HBB is getting good volume ... 170k+ just today
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by larry81 »

Today I finally converted my ZDB/XBB holding to HBB in my non-registered account.

I still own shorter terms bonds ETF (VSB) in my registered accounts to balance duration a little bit :)
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by larry81 »

Anyone else using this newish ETF ?

HBB change the tax-optimization logic for investor with both taxable and registered accounts. Since there no more distributions for bonds holding, registered accounts can now be filled with others assets classes instead of bonds (ex: REIT or US ETF to avoid the 15% withholding tax). Bonds can now be held in taxable account without any negative tax impact.

I used to do (my non-registered account is much larger than my registered accounts) :

TFSA = REIT
RRSP = BONDS
NON-REG = US, CAD, INTERNATIONAL, REST OF BONDS, REST OF REIT

now i might optimize things a little bit and:

TFSA: REIT
RRSP: REIT or US
NON-REG: US, CAD, INTERNATIONAL, BONDS

Comments more than welcome ! :)
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by gsp_ »

International should come ahead of US in the RRSP.

Haven't bought HBB yet but probably will at some point.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by Spudd »

gsp_, why is that? In the RRSP you don't get charged US withholding tax, but I wasn't aware of any advantage for international?
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by gsp_ »

Spudd wrote:gsp_, why is that? In the RRSP you don't get charged US withholding tax, but I wasn't aware of any advantage for international?
US listed international ETFs avoid even larger withholding tax(due to higher yield) vs US ETFs. Canadian listed international ETFs aren't subject to US withholding but they come with higher MERs and international tax withholding when compared to their US listed counterparts. Lastly , if one is comfortable with HBB we can assume they'd also be ok with owning HXS which makes it an even clearer decision.

VXUS(or VEA + VWO) in RRSP + HXS unregistered is cheaper after taxes than any alternative I know of in limited RRSP situations.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by parvus »

gsp_ wrote:
Spudd wrote:gsp_, why is that? In the RRSP you don't get charged US withholding tax, but I wasn't aware of any advantage for international?
US listed international ETFs avoid even larger withholding tax(due to higher yield) vs US ETFs. Canadian listed international ETFs aren't subject to US withholding but they come with higher MERs and international tax withholding when compared to their US listed counterparts.
I'm not sure that's true. With a U.S.-listed international ETF, the tax treaties are between the relevant foreign country and the U.S., not Canada. So while USians may be able to benefit from tax treaties, it's not clear that a Canadian buying an international ETF on U.S. exchange will get that deductible tax treatment flowed through.

For example, in an open account, you could claim U.S. withholding against taxes paid. But you won't be able to claim international withholding against taxes paid because the U.S. ETF has already paid them (or rather, foreign governments have already levied them). They are not U.S. source dividends.

In an RRSP, I suspect a similar difficulty arises. U.S. withholding doesn't apply, but foreign government withholding before U.S. distribution is not recoverable.

It may well be true that thanks to economies of scale U.S.-listed international ETFs can lessen the dividend withholding tax drag.

All the more reason to encourage more swap-based total return ETFs.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by gsp_ »

parvus wrote:I'm not sure that's true.
Can you be more specific?
With a U.S.-listed international ETF, the tax treaties are between the relevant foreign country and the U.S., not Canada. So while USians may be able to benefit from tax treaties, it's not clear that a Canadian buying an international ETF on U.S. exchange will get that deductible tax treatment flowed through.

For example, in an open account, you could claim U.S. withholding against taxes paid. But you won't be able to claim international withholding against taxes paid because the U.S. ETF has already paid them (or rather, foreign governments have already levied them). They are not U.S. source dividends.

In an RRSP, I suspect a similar difficulty arises. U.S. withholding doesn't apply, but foreign government withholding before U.S. distribution is not recoverable.
Sure but how does that go against what you were responding to?
It may well be true that thanks to economies of scale U.S.-listed international ETFs can lessen the dividend withholding tax drag.
They do, as posted in previous threads. Whatever the reason, the rates they get charged by ex North American countries are substantially lower than ours.
All the more reason to encourage more swap-based total return ETFs.
Absolutely but unless you know something the rest of us don't, no such EAFE or EM beast currently exists here.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by parvus »

gsp_ wrote:Can you be more specific?
Apologies. This is what I was responding to:
US listed international ETFs avoid even larger withholding tax(due to higher yield) vs US ETFs. Canadian listed international ETFs aren't subject to US withholding but they come with higher MERs and international tax withholding when compared to their US listed counterparts.
Dividend withholding, in this instance, is not commutative. A (Canadian tax deductions) = B (American tax deductions) + C (international tax deductions) does not equal B + C depending on the location of A. If A buys ADRs directly on a U.S. exchange, some ADRs don't withhold taxes; others do.
All the more reason to encourage more swap-based total return ETFs.
Absolutely but unless you know something the rest of us don't, no such EAFE or EM beast currently exists here.
I have difficulty predicting the present, let alone the future. I think swap arrangements could be good -- but with all the Michael Lewis hysteria about high frequency trading, combined with the resentment on Main Street from the folks who lost the houses they couldn't afford in the first place, I think I won't stick my head up just yet. :roll:
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Re: HBB - Horizon Canadian Select Universe Bond ETF

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I remain confused about what you were disagreeing with so I'll try to further explain what I wrote. From where I'm sitting you have stated true and well understood facts which don't disagree with or refute what you were responding to.
US listed international ETFs avoid even larger withholding tax(due to higher yield) vs US ETFS.
The yield of international ETFs is currently about 1% higher than US ones, resulting in roughly .15% of additional US withholding saved in an RRSP. Additionally, though I did not mention it, you save income tax in taxable on that 1% higher foreign income and defer the (hopefully) higher capital gains from US ETFs.
Canadian listed international ETFs aren't subject to US withholding but they come with higher MERs and international tax withholding when compared to their US listed counterparts.
True Canadian listed international funds(not clone funds) avoid US withholding. They are subjected to higher foreign taxes than US funds(roughly 12% vs 7% on average) both of which are lost in RRSPs. [Here's where you might have called me on being able to recuperate the foreign withholding by keeping true Canadian funds unregistered. In the end it closes the gap but still gives a tiny edge to international in RRSP without considering swap ETFs.] Canadian listed funds have higher MERs than US ones although the gap has been closing lately(ZEA at .23% is a big improvement on what was available 5 months ago) making this location decision a photo finish(sans swaps). Including swaps it's an easy win for international in RRSP.

Highly recommend using newguy's Real return after taxes and fees tool to figure out these types of location and product optimization issues. Investors can enter their own tax and investing specifics and see what products and location should work best for them.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

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gsp_ wrote:I remain confused about what you were disagreeing with so I'll try to further explain what I wrote. From where I'm sitting you have stated true and well understood facts which don't disagree with or refute what you were responding to.
US listed international ETFs avoid even larger withholding tax(due to higher yield) vs US ETFS.
The yield of international ETFs is currently about 1% higher than US ones, resulting in roughly .15% of additional US withholding saved in an RRSP. Additionally, though I did not mention it, you save income tax in taxable on that 1% higher foreign income and defer the (hopefully) higher capital gains from US ETFs.
It could be that I'm just a blockhead on this issue (which wouldn't surprise me at all). Are you saying that U.S.-listed international ETFs pay higher (nominal) yields? Or are you saying that they have higher (tax-)effective yields? I would grant the first point, but not the second.

Unless the U.S. international ETF invests in tax-favourable ADRs -- some are, some aren't -- then the tax advantages cannot be passed on to Canadian investors.
Canadian listed international ETFs aren't subject to US withholding but they come with higher MERs and international tax withholding when compared to their US listed counterparts.
True Canadian listed international funds(not clone funds) avoid US withholding. They are subjected to higher foreign taxes than US funds(roughly 12% vs 7% on average) both of which are lost in RRSPs.
What might these foreign taxes be? I'm curious. Is it the result of tax treaties or something else? (The normal U.S. withholding rate is 15%, but it could be 30% for non-U.S. equities.)

Anyway, apologies again for asking stupid questions. I think I understand why some folks would prefer to hold U.S.-based ETFs, trading currency costs for better tracking error, as against a Canadian clone of a U.S. ETF. And there could be tax advantages, in an RRSP or an open account (but not in a TFSA).

The same could equally apply to a U.S.-listed international ETF: currency trade-offs for better tracking error. But, so far as I've read, there is no tax advantage here. The U.S. -International tax treaty on withholding is not commutative, which is to say that Canadian investors in U.S.-based international ETFs don't enjoy the same potential tax recovery/exemption advantages that U.S. investors do.

And I've asked the Canadian ETF companies about that. But I can't say the answers were all that clear. So I remain a blockhead. :wink:

Anyway, here is some stuff I looked up in the past.
Attachments
excess withholding on ADR[1].pdf
(185.74 KiB) Downloaded 18 times
Canadians investing in the US[1].pdf
(116.47 KiB) Downloaded 22 times
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by gsp_ »

parvus wrote:It could be that I'm just a blockhead on this issue (which wouldn't surprise me at all). Are you saying that U.S.-listed international ETFs pay higher (nominal) yields? Or are you saying that they have higher (tax-)effective yields? I would grant the first point, but not the second.
All the quote you responded to said was 3% is more than 2% and therefore benefits more from RRSP sheltering.
Unless the U.S. international ETF invests in tax-favourable ADRs -- some are, some aren't -- then the tax advantages cannot be passed on to Canadian investors.
Indeed but the fact they pay lower tax rates translates into a cost advantage for us. There is less lost foreign withholding.
Canadian listed international ETFs aren't subject to US withholding but they come with higher MERs and international tax withholding when compared to their US listed counterparts.
What might these foreign taxes be? I'm curious. Is it the result of tax treaties or something else? (The normal U.S. withholding rate is 15%, but it could be 30% for non-U.S. equities.)
Principally dividend withholding by foreign countries I assume. I figure it's based on lower negociated rates(likely going both ways) vs our agreements with said countries. I have no knowledge here(nor do I care too much), I'm simply comparing the tax rates products on each side of the border have paid in the last few years. Bender and Bortolotti later did more robust calculations in this white paper. They mostly used Ishares funds for their examples while my posts here usually focus on VG ETFs since that's what I(and many here) own.
The same could equally apply to a U.S.-listed international ETF: currency trade-offs for better tracking error. But, so far as I've read, there is no tax advantage here. The U.S. -International tax treaty on withholding is not commutative, which is to say that Canadian investors in U.S.-based international ETFs don't enjoy the same potential tax recovery/exemption advantages that U.S. investors do.
As stated numerous times before, this is all correct and no one has stated otherwise. Yet again, the lower tax rates paid by US listed ETFs means there is less tax loss there vs higher paying Canadian funds in RRSPs.

Thanks for the links and for the exercise of revisiting this issue now that better directly held Canadian options exist. I hadn't realized that for investors who aren't comfortable with swap based ETFs, have no US$ income and are using ZEA for international exposure, the US vs international decision in RRSPs is a wash. For the rest of us(including the OP), international should still be prioritized in the RSSP.

Edit: Another thing this exercise helped me realize(or rediscover) is that since the April 30th lowering of fees by BMO, ZEA is now a better option for EAFE exposure in taxable than all US listed ETFs. At .23% all in cost, no US ETF could ever really beat it unless dividend yields or foreign tax withholding levels drop significantly since on their own, they account for at least a .2% anchor. At its previous .34% MER a few US listed options were ever so slightly cheaper.
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HBB.to

Post by bluesky14 »

Hi all, I am slowly transitioning my overall portfolio to a couch potato style.
I think I have a good handle on how I am allocating ETFs across my TFSA/RRSP/Margin accounts in order to maximize tax efficiency.

The one thing I really don't understand is Bonds. I still have some bank GICs which I am including as fixed income, but even including the GICs I am light on the overall fixed income percentage.

The only bond i currently have right now is HBB.to, in my Margin account of course. I know the risks of using this bond style, as well as the tax benefits.

So, given the risk/benefits of HBB.to, does it make sense to use HBB.to as the sole bond holding in a portfolio? That is to say, buy ONLY HBB.to for bonds and hold in a non-registered account, and forget about any other type of bond ETF in registered accounts?
I was looking at ZDB as well, but not sure how it truly compares in tax efficiency to HBB in a non-registered account.

This is based on a 20-25 year window to retirement.

Thoughts?
Thanks.
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Re: HBB - Horizon Canadian Select Universe Bond ETF

Post by Peculiar_Investor »

You might also want to review the discussion of HBB in non-registered vs XBB in RRSP..., plus search the forum for ZDB (for example -- ZDB - Hallelujah!).
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