Last fall, Horizons Exchange Traded Funds launched two innovative new ETFs. Rather than simply holding the stocks in the indexes they track, these funds use a derivative called a “swap” to get exposure to the market.
While swap-based ETFs are new to Canada, they’ve been popular in Europe for years. In fact, providers such as Lyxor and db x-trackers, which together offer a couple of hundred funds, use the structure for almost all of their products. Even iShares now uses swap-based ETFs in Europe, though not in North America.
I’ve always appreciated the simplicity and transparency of traditional index funds, and swap-based ETFs don’t fit that description. But they do have the potential to offer significant advantages, especially to investors who have maxed out their RRSPs and other tax-sheltered accounts. Let’s pop the hood on these pioneering ETFs and see how they work.
I’ll show you mine if you show me yours
The first swap-based ETF to hit the Canadian market was the Horizons S&P/TSX 60 Index ETF (HXT). Like the iShares S&P/TSX 60 Index Fund (XIU), this fund tracks a popular index of the 60 largest public companies in Canada.