Best Canadian ETFs for 2019

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All four Canadian equity ETFs are returning under the new revised panel: VCN, XIC, HXT and ZCN (See the accompanying chart for full ETF names.) While PWL’s Ben Felix is not generally a fan of the swap structure, a solid majority (defined as at least 5 “votes”) opted to retain HXT, which provides exposure to the largest 60 Canadian stocks at a rock-bottom MER of 0.04%, and because of its structure is particularly tax-efficient in non-registered portfolios.

Best Canadian ETFs – The list

ETF name Ticker Management Fee MER # of Holdings Description
Vanguard FTSE Canada All Cap Index ETF VCN 0.05 0.06 212 Exposure to Canadian small, medium and large caps, ultra low fee
iShares Core S&P/TSX Capped Composite Index ETF XIC 0.05 0.06 250 Tracks Canada’s best known index with a very low fee
Horizons S&P/TSX 60 ETF HXT 0.03 0.03 60 Tax-efficient “swap” ETF but added risk after 2019 federal budget questioned structure
BMO S&P TSX Capped Composite IDX ETF ZCN 0.15 0.18 251 Fee as low as VCN and XIC; more assets than VCN

This remained the case even after the 2019 federal budget was released on March 19th. The Budget suggested there will be changes on how swap-based ETFs (like HXT), designed to curb “unfair tax advantages” accruing to taxable investors using so-called Total Return ETFs that don’t hold securities directly but use a swap structure to defer or convert highly taxed dividend income (from qualified Canadian dividends) into lower-taxed capital gains. Horizons ETFs Management, maker of HXT and 14 other total return ETFs, said it is assessing the impact but that the changes won’t take effect until after the 2019 tax year. “It is proposed, not passed,” said Mark Yamada, “HXT has a minimal taxable gain of about 3% and there will be no change for at least a year.” PWL’s Ben Felix maintained his skepticism of the swap-based structure: “Passed or not, we now know that the regulatory risk is real.”

Yves Rebetez is also cautious about HXT: “ETFs should always preferably be underpinned by the assets they are meant to provide exposure to. When that is not the case, surprises can occur, such as the latest in relation to Total Return swap-based ETFs, where the structure itself is now challenged due to ‘unfair’ tax advantages. So, by design and structure one can attempt even better outcomes than thru pure, direct replication but that comes at a risk, trade-off wise.” That said, he agreed with the majority to keep HXT as an All-star at least for 2019.

While the announcement caught the industry by surprise, Alan Fustey said “I wouldn’t be surprised if there was some modification to this proposal in the same way the passive income rules for corps were modified once the government received feedback.”

There was also some debate about adding one of Canada’s oldest and largest ETFs, the 60-stock XIU. Dale Roberts prefers the TSX 60-focused XIU over the ‘broader’ Canadian market ETFs. “It has a slight outperformance over XIC and I’d guess that will continue. It has more of what works in Canada: the big banks, telcos, pipelines and utilities. I’m not sure more gets you more in Canada. The best way to diversify Canada is by way of US and International stocks and bonds, local and international. I don’t think the answer to Canada’s undiversified economy and market is more Canadian companies.”

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