That’s Why We Created the Horizons Total Return Index (TRI) ETF Suite

Over time, regular investment funds can pay dividends or interest, providing yield, and may appreciate in value.

However, distributions from those investment funds are generally taxable events for investors, and the resulting tax liability can reduce an investor’s potential total return.

Horizons ETFs believes that investors should be able to access passive index strategies in the most cost and tax-efficient way possible.

Unique to the Canadian ETF landscape, Horizons Total Return Index (TRI) ETFs collectively offer tax-efficient exposure to 15 different indices and asset classes, enabling investors to access the total return on their investment as long as they remain invested.

The Canadian ETF universe has a large variety of traditional, physically-replicated benchmark or index products that can offer investors comparatively low-cost exposure to major indices and benchmarks. However, distributions from these investment funds are generally taxable events for investors. These taxable distributions can reduce an investor’s potential after-tax return, when compared to the potential after-tax return on investment from owning a comparable Horizons TRI ETF.

For illustrative purposes only.

The major difference between the Horizons TRI ETFs and other corporate class funds is that our ETFs primarily hold derivatives to achieve their investment returns, although physically-replicated Index and benchmark ETFs are also held within Horizons ETF Corp.

Within Horizons ETF Corp., the Horizons TRI ETFs offer distinct tax efficiencies for investors. The tax-efficiency to investors is primarily achieved through our proprietary, synthetic Total Return structure, which is used by most of the Horizons TRI ETFs. There are also tax efficiencies realized by Horizons ETF Corp. itself, when compared to a mutual fund trust structure, since the corporation can use widely accepted corporate tax accounting options, such as the ability to use losses and expenses to offset income across all classes.

The majority of Horizons TRI ETFs utilize a synthetic structure, known as a total return swap.

Unlike a traditional physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, these synthetic-exposure based Horizons TRI ETFs receive the total return of the relevant index by entering into Total Return Swap agreements with one or more counterparties, typically large Canadian financial institutions, which provide the ETFs with the total return of the relevant index.

The Horizons TRI ETFs that utilize total return swaps achieve tax-efficiency primarily by receiving the total return of the underlying index (before fees) – the value of the underlying index constituent distributions get reflected in the ETF’s share price and are not distributed to shareholders. This means that an investor is generally only expected to be taxed on any capital appreciation of their ETF shares if, and when, their shares of the ETF are sold. To gain exposure to certain indices through a total return swap, counterparties may charge the Horizons TRI ETF a swap fee (depending on the underlying asset). The Horizons TRI ETFs that provide exposure to foreign equities and fixed income securities will typically be charged a swap fee. None of the Horizons TRI ETFs that provide exposure to Canadian equities and preferred shares currently have a swap fee associated with their total return swap.

To understand how this works, download our Corporate Class Brochure for more information.

Download Brochure

The Canadian ETF universe has a large variety of traditional, physically-replicated benchmark or index products that can offer investors comparatively low-cost exposure to major indices and benchmarks. However, distributions from these investment funds are generally taxable events for investors. These taxable distributions can reduce an investor’s potential after-tax return, when compared to the potential after-tax return on investment from owning a comparable Horizons TRI ETF.

For illustrative purposes only.

The major difference between the Horizons TRI ETFs and other corporate class funds is that our ETFs primarily hold derivatives to achieve their investment returns, although physically-replicated Index and benchmark ETFs are also held within Horizons ETF Corp.

Within Horizons ETF Corp., the Horizons TRI ETFs offer distinct tax efficiencies for investors. The tax-efficiency to investors is primarily achieved through our proprietary, synthetic Total Return structure, which is used by most of the Horizons TRI ETFs. There are also tax efficiencies realized by Horizons ETF Corp. itself, when compared to a mutual fund trust structure, since the corporation can use widely accepted corporate tax accounting options, such as the ability to use losses and expenses to offset income across all classes.

The majority of Horizons TRI ETFs utilize a synthetic structure, known as a total return swap.

Unlike a traditional physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, these synthetic-exposure based Horizons TRI ETFs receive the total return of the relevant index by entering into Total Return Swap agreements with one or more counterparties, typically large Canadian financial institutions, which provide the ETFs with the total return of the relevant index.

The Horizons TRI ETFs that utilize total return swaps achieve tax-efficiency primarily by receiving the total return of the underlying index (before fees) – the value of the underlying index constituent distributions get reflected in the ETF’s share price and are not distributed to shareholders. This means that an investor is generally only expected to be taxed on any capital appreciation of their ETF shares if, and when, their shares of the ETF are sold. To gain exposure to certain indices through a total return swap, counterparties may charge the Horizons TRI ETF a swap fee (depending on the underlying asset). The Horizons TRI ETFs that provide exposure to foreign equities and fixed income securities will typically be charged a swap fee. None of the Horizons TRI ETFs that provide exposure to Canadian equities and preferred shares currently have a swap fee associated with their total return swap.

To understand how this works, download our Corporate Class Brochure for more information.

Download Brochure

Performance Comparison Between a Horizons TRI Bond ETF and a Traditional Index Bond ETF

Performance Comparison Between a Horizons TRI Bond ETF and a Traditional Index Bond ETF

Horizons TRI ETFs have the potential to provide a greater after-tax return on investment when held in a non-registered account, compared to a traditional, physically-replicated index ETF. As an illustrative example only, assuming no move in market value and a 3% annual distribution, paid quarterly, on an initial investment of $1 million, our Horizons TRI ETFs’ tax-efficient strategy could generate as much as $77,463 in after-tax savings over a 10-year period, for an Ontario investor in the highest marginal tax bracket. It is important to note that no Horizons TRI ETFs re-characterize investment income as capital gains.

Bar Chart Bar Chart
Investment Amount $1,000,000.00
Annualized Yield of Underlying 3.00%
Applicable Income Tax Rate 53.53%
Foreign Withholding Tax Rate 0.00%
Distribution Frequency (Physical) Quarterly
Annualized Investment Return 0.00%
Capital Gains Tax Rate 26.76%
Total Investment Horizon (Years) 10
Annual Investment
Fees and Expenses
Total Return Index ETF 0.23%
Physical Investment ETF 0.09%
  • Original Investment – Horizons Corporate Class $1,000,000.00
  • Constituent Distributions (3.0%) – Horizons Corporate Class Not Applicable
  • Compounded Pre-tax Investment Value – Horizons Corporate Class $1,319,152.51
  • Cumulative Pre-tax Investment Return – Horizons Corporate Class 31.92%
  • Annualized Pre-tax Investment Return – Horizons Corporate Class 2.81%
  • Capital Gain (Loss Carry Forward) – Horizons Corporate Class $319,152.51
  • Capital Gains Tax Payable – Horizons Corporate Class $85,405.21
  • Distribution Tax Payable – Horizons Corporate Class blank
  • Total Tax Paid – Horizons Corporate Class $85,405.21
  • After Tax Proceeds – Horizons Corporate Class $1,233,747.30
  • Cumulative After Tax Investment Return – Horizons Corporate Class 23.37%
  • Annualized After Tax Investment Return – Horizons Corporate Class 2.12%
  • Original Investment – Traditional $1,000,000.00
  • Constituent Distributions (3.0%) – Traditional $336,313.13
  • Compounded Pre-tax Investment Value – Traditional $1,336,313.13
  • Cumulative Pre-tax Investment Return – Traditional 33.63%
  • Annualized Pre-tax Investment Return – Traditional 2.94%
  • Capital Gain (Loss Carry Forward) – Traditional blank
  • Capital Gains Tax Payable – Traditional blank
  • Distribution Tax Payable – Traditional $180,028.42
  • Total Tax Paid – Traditional $85,405.21
  • After Tax Proceeds – Traditional $1,156,284.71
  • Cumulative After Tax Investment Return – Traditional 15.63%
  • Annualized After Tax Investment Return – Traditional 1.46%
  • Original Investment – Corporate Class Minus Traditional blank
  • Constituent Distributions (3.0%) – Corporate Class Minus Traditional negative $336,313.13
  • Compounded Pre-tax Investment Value – Corporate Class Minus Traditional negative $17,160.62
  • Cumulative Pre-tax Investment Return – Corporate Class Minus Traditional negative 1.72%
  • Annualized Pre-tax Investment Return – Corporate Class Minus Traditional negative 0.13%
  • Capital Gain (Loss Carry Forward) – Corporate Class Minus Traditional $319,152.51
  • Capital Gains Tax Payable – Corporate Class Minus Traditional $85,405.21
  • Distribution Tax Payable – Corporate Class Minus Traditional negative $180,028.42
  • Total Tax Paid – Corporate Class Minus Traditional negative $94,623.21
  • After Tax Proceeds – Corporate Class Minus Traditional $77,462.58
  • Cumulative After Tax Investment Return – Corporate Class Minus Traditional 7.75%
  • Annualized After Tax Investment Return – Corporate Class Minus Traditional 0.75%

*FOR ILLUSTRATIVE PURPOSES ONLY.
The above example is for Illustrative Purposes Only, over a 10-year period, using the assumptions noted in the prior page and highlights the expected after-tax performance benefits of holding a Horizons TRI ETF (HBB) versus another Canadian-domiciled physically replicated Canadian bond ETF in a non-registered account, assuming both ETFs earned/ reflected a net 3% income distribution yield (in CAD) and track the exact same universe of bonds and assumes no changes to the market value of the Index constituents. This example does not take into account any fees or expenses of the ETFs, (aside from the stated investment fees and expenses) nor any commissions, fees or expenses that would be associated with a purchase or sale of ETF units/shares. For the Physical Investment, It contemplates the reinvestment of accrued distributions on a quarterly basis, and a reduction in units annually to pay the associated tax liability for that year. The example does contemplate the sale of the ETF units/shares at the end of the period and the expected tax liability that would result. Both ETFs are held by an Ontario resident investor in the highest tax bracket, who would have a marginal tax rate of 53.53% in 2020.

Bar Chart Bar Chart

Get the Total Return

The Horizons ETFs family includes a broadly diversified range of investment tools to help investors of all experience levels meet investment objectives in a variety of market conditions.

Get the total return on your investments with Horizons Total Return Index ETFs. Find out more by subscribing to Horizons Corporate Class updates today.

Subscribe for
Corporate Class Updates