Your Complete Guide to Index Investing with Dan Bortolotti

A New ETF Structure for Accumulators

2018-05-29T21:19:36+00:00February 17th, 2017|Categories: ETFs, New products, Taxes|Tags: , |25 Comments

ETF launches are generally unexciting these days: most new products focus on increasingly narrow niches or exotic strategies. But last week BMO unveiled an innovative ETF structure that may just have some lasting appeal. They launched a new share class of four existing short-term bond ETFs: called “Accumulating Units,” these new funds do not pay their distributions in cash like traditional ETFs. Instead, they reinvest all the interest payments immediately and increase the net asset value (and market price) accordingly.

An example will help. Consider a bond ETF with a unit price of $15 at the beginning of the year. Over the next 12 months it pays out 3% in interest and falls in price by 1%. The fund’s one-year total return would therefore be 2% (the 3% interest minus the 1% capital loss). If this ETF were available in both the traditional and Accumulating Units structure, both would report the same performance. But they would arrive there in different ways:

Traditional ETF Accumulating Units
Unit price at beginning of year $15.00 $15.00
Cash distributions (3%) $0.45 $0
Reinvested distributions (3%) $0 $0.45
Capital loss (1%) -$0.15 -$0.15
Unit price at end of year $14.85 $15.30
Value of ETF unit + cash $15.30 $15.30
One-year total return 2% 2%

What they’re not

The idea of reinvested distributions is not new, but the Accumulating Units structure is quite different from other strategies you may be familiar with:

They don’t work like mutual funds. One of the benefits of mutual funds is that interest and dividends can be fully reinvested rather than paid in cash. The net asset value of the fund increases to reflect this reinvested income over the course of the year, the same as in the Accumulating Units structure.

With a mutual fund, however, the unit price falls at the end of the year when the fund declares that distribution. Then each unitholder receives additional shares at that lower price. The value of your overall holding stays the same, but you now have more shares, each with a lower price. (For an excellent explanation of reinvested distributions in mutual funds, see page 10 of this guide from RBC.)

BMO’s Accumulation Units do not work the same way: when these ETFs declare their distributions, you won’t see the unit price fall, and you won’t receive any additional shares.

They’re not glorified DRIPs. A dividend reinvestment plan (DRIP) allows you to receive ETF distributions in the form of new shares rather than cash. You can set these up through your brokerage, and they’re a convenient way to reduce trading costs and keep your cash balance to a minimum. Unlike with mutual funds, which allow you to hold fractional shares, with ETFs you can only receive whole shares. So if the fund’s price is $20 and the distribution is $104, you’ll get five new shares plus $4 in cash.

BMO’s Accumulation Units do allow you reinvest every cent of the ETF’s distributions, but it’s not helpful to think of them as glorified DRIPs: they work quite differently. With a DRIP, the number of shares you hold increases with each reinvested distribution. But with these new ETFs, the number of units you hold stays constant and the reinvestment is reflected in a higher price per unit.

They’re not the same as swaps. Horizons ETFs offers several funds that use total-return swaps rather than holding stocks or bonds directly. These ETFs do not pay any distributions: the effect of dividends and interest causes the share price of the ETF to increase. Swap-based ETFs and Accumulating Units have that much in common, but the similarities end there.

The appeal of swap-based ETFs is they generate no taxable dividends or interest: all of the price increases will eventually be taxed as capital gains (or losses) when you sell your shares. But Accumulating Units offer absolutely no tax advantage over traditional ETFs: all of the reinvested distributions from BMO’s new bond ETFs will be fully taxable as interest.

Another important difference between swap-based ETFs and Accumulating Units is that the latter hold the underlying securities directly. The Horizons ETFs use a derivative and carry some additional risk due to this “synthetic” structure.

Where to use them

BMO’s Accumulating Units structure is an innovative idea, and they may be useful for investors who don’t need income and would prefer to take full advantage of compounding.

There may be a behavioural benefit as well, at least when it comes to bond ETFs. These days most bonds in traditional ETFs trade at a premium, which means their current price is above their par value because the bonds were issued when interest rates were higher. As these bonds approach maturity their prices gradually decline, and the ETF’s unit price falls along with it—like the traditional ETF in the example above. Investors holding that ETF would have enjoyed a 2% return, but many would have failed to account for the cash distributions: they would have seen their ETF fall in price from $15 to $14.85 and figured they lost money. Meanwhile, an investor using Accumulating Units would clearly see the 2% return in the price increase from $15 to $15.30.

That said, I strongly recommend against using Accumulating Units in a taxable account. These funds would make tracking your adjusted cost base a nightmare. You would need to adjust the book value of the fund upwards for every reinvested distribution or you could end up reporting capital gains that didn’t exist and paying a large amount of unnecessary tax.

Let’s return to the above example to illustrate. An investor who sold her traditional ETF units at the end of the year would properly report a capital loss of $0.15 per share, since she bought the ETF at $15 and sold it at $14.85. But the investor in the Accumulating Units might find himself reporting a capital gain of $0.30 per share, since be bought at $15 and sold at $15.30. But this is incorrect: he should have adjusted his cost base by adding the $0.45 in reinvested distributions, resulting in a book value of $15.45 per share. Then when he sold the shares at $15.30 he would report the same $0.15 capital loss.

As I’ve written about many times, even traditional bond ETFs are poor choice in a non-registered account, so perhaps these four new funds from BMO won’t be tempting for taxable investors. But if the structure catches on and fund providers start offering, say, Canadian equity ETFs with an Accumulating Units structure, they have the potential to trip up a lot of investors with taxable accounts. And the cost of improper tax reporting could be huge. So keep these ETFs where they belong: in your RRSP or other registered account.



  1. Que February 17, 2017 at 1:29 pm

    Would you still then recommend ZDB in a taxable account? as discussed here:

    Or would you recommend GICs instead? as discussed here:


  2. Richard February 17, 2017 at 1:33 pm

    Great article and thank you for the explanation. I am in the process of re-balancing my portfolio. Adding to my RRSP for my Wife and I. So this could be something that would work for us over the next 10 years. At present we have too much cash and it is time to make some changes. I will look into the dividend reinvestment plan (DRIP). I suspect this is something that I could have been using for our long term investment in our RRSP Equity ETF with in turn would have provided a dollar cost averaging for long term investments. Well, I am still learning the Coach Potato thing.

  3. Canadian Couch Potato February 17, 2017 at 2:06 pm

    @Que: Either could be appropriate, or even some combination of both:

  4. Kyle S February 17, 2017 at 3:55 pm

    Since this brings up bonds again, there’s something I’ve been wondering recently. Bond yields are relatively low, the yield on ZAG is only a little bit higher than, say, VCN or VXC. I realize that they’re more tax inefficient than equity ETFs but might it not make more sense to protect the capital growth of equity ETFs in a tax sheltered account since they would be expected to grow much more than a bond ETF?

    You would be taking the tax hit on the bonds but perhaps sheltering the growth of an equivalent amount of equities would balance this out?

  5. Tennis Lover February 17, 2017 at 5:07 pm

    Thanks for the article and explanation. I hold some BMO Aggregate Bond Index Fund ETF (ZAG) in an RRSP account without a DRIP. It would be great if BMO offered accumulation units for a version of this ETF as this would allow reinvestment of the monthly distributions.

  6. Murray February 17, 2017 at 5:19 pm

    Hi CCP,

    I am incorporated so I do my investing in my corp. Before I understood tax implications I bought VAB but now want to transfer to something more tax-efficient. I am considering HBB or ZDB or a GIC ladder.

    My question for you is I am about 20 years from retirement, so am I better to keep a bond ETF (HBB or ZDB) for 20 years or a 5-year GIC ladder? Is it the case that on the GIC’s I would be taxed as each one matures while with the ETF I could defer all taxes for 20 years when I would pay capital gains when I sell to fund retirement?


  7. CK February 17, 2017 at 8:32 pm

    Hi Dan,

    Quick question regarding ZST.L,

    I have a Couch Potato TFSA and RRSP/DPSP but I wanted to make a Permanent Portfolio in another RRSP account. Is ZST.L an acceptable choice for the cash portion? I know it has some Preferred Shares in it and you said they are usually best left out of RRSPs. My other choice is to use PSA ticker. Any insight? Thanks

  8. Canadian Couch Potato February 18, 2017 at 11:26 am

    @CK: Why not just use a high-interest savings account?

  9. Canadian Couch Potato February 18, 2017 at 11:29 am

    @Murray: I can’t speak to which option would be more appropriate for you, but you should understand that GICs are not “taxed as each one matures.” GICs simply mature at face value with no capital gain or loss. Only the interest is taxable every year. This may help with the decision:

  10. LawrenceW February 18, 2017 at 12:28 pm

    as someone investing in a corp taxable account, HBB is my pick.

  11. Alex February 18, 2017 at 1:47 pm

    Another alternative for fixed income in taxable account are preferred shares.

  12. CK February 18, 2017 at 2:40 pm

    @CPP I have the Permanent Portfolio in a new RRSP account with Questrade. It seems easier to me to keep it all together at 25% x 4 in ETFs.

  13. Phil February 19, 2017 at 6:10 pm

    If your considering fixed income in taxable accounts with HBB or other discount bond funds you may appreciate this
    It seems wise to keep a portion of your FI funds in a bond eft incase you need to rebalance.

  14. Kooritsuki February 20, 2017 at 10:54 am

    Thanks for the article. This is for sure an interesting ETF. However, I don’t quite agree with your tax analysis and believe that this is maybe more tax efficient in a taxable account rather than an RRSP (and irrelevant in a TFSA).

    In your example, you have calculated a capital loss for the regular ETF investment. However, i believe you must also factor in that the distribution is fully taxable either as a dividend or an interest income, which is taxed at a higher rate than a capital gain is.

    As for the accumulated units, if the reinvested amount is declared by the ETF as “reinvested distribution” rather than just a reinvested amount within the fund, it is true that one would need to track their adjusted cost base, which should arrive at the same taxable amount at the end of the day as the regular ETF anyway once taxable distribution is included in the calculation.

  15. Canadian Couch Potato February 20, 2017 at 12:04 pm

    @Kooritsuki: My tax analysis is accurate. The structure of the ETF has no effect on the amount of tax payable: the situation is exactly the same for both the traditional and Accumulating Units. The issue I pointed out is simply that the bookkeeping burden is much higher with the Accumulating Units structure.

  16. Shawn S. February 20, 2017 at 2:39 pm

    To me, these DO sound exactly like glorified DRIPs. Not that there’s anything wrong with that.

  17. Nick de Peyster February 21, 2017 at 8:31 am

    For a U.S. investor, would these run afoul of the PFIC rules?

    Nick de Peyster

  18. NewJohnny February 21, 2017 at 7:00 pm

    I noticed that distributions are annual (div dates in December) and payed out in January. This may have an effect on rebalancing rules, fiscal year-end considerations and trading frequencies.

    e.g. If I held ZFS.L for nine months and sold in November, I would not receive any interest payments for the year.

  19. APF Blogger February 25, 2017 at 9:37 pm

    Thanks for the helpful explanation. Not sure yet if these will be useful in my portfolio, but good to gain a better understanding either way.

  20. Greg February 27, 2017 at 3:00 pm

    It doesn’t seem worth it to pay an extra ~10bps on the MER to get this feature. If they extended it to ZAG, it’d be worth buying for the same MER.

  21. Jeff March 3, 2017 at 2:53 am

    I am trying to find fixed income high yielding investments that do not pay any dividends and these accumulator units seem like a good idea except that they are based only on bonds so the yield will not be very high. I would like an ETF or Mutual Fund that is based on Preferred Shares but just automatically reinvests the distributions back into the NAV. Have you heard if there is any product like this? The Horizon Total Return Index ETF’s are great except that they do not have one that is based on Preferred Shares. Their HXH is still just based on common shares so it fluctuates with the TSX.

  22. sk April 16, 2017 at 7:39 pm

    Read through many of the articles in the past weeks and would like to thank you for sharing all that knowledge. I would like to start investing but can’t pull the trigger. 50k to invest and think I want to go with ZDB (30%), VCN (25%), XAW (40%) and IGT (5%). My problem is I can only invest in a non-registered account (temporary work permit) and fear I am making a huge mistake by missing some tax relevant information. I don’t mind not having the most tax efficient profile but being a complete newbie I am overwhelmed by the choices (e.g. GIC vs. bonds as you stated in

    Would you consider the above selection to be ok to start with? I appreciate any help, to finally get my feet of the ground.

  23. Canadian Couch Potato April 16, 2017 at 8:21 pm

    @sk: The portfolio you have described is just fine in a taxable account. My suggestion would be to forget about the gold and just move ahead. By keeping things very simple you should be able to avoid feeling overwhelmed.

  24. sk April 17, 2017 at 9:47 pm

    Thank you very much

  25. Manny April 19, 2017 at 1:02 am

    @CCP what do you think about this:

    BS? true?

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