All of Horizons Corporate Class ETFs are TSX-listed ETFs and can be purchased or sold through an advisor or in your self-directed brokerage account.
There are numerous risks associated with investing. Each of the individual ETFs have risk ratings associated with the inherent historical market risk of their respective investment objectives, and their prospectuses detail other risks associated with investing in them as well. However, in terms of risk associated with the corporate structure, we view there to be limited risk relative to traditional mutual fund trusts.
One key risk associated with a corporate structure relative to a traditional mutual fund trust is the fact that any income earned within the corporate structure cannot be distributed to end unitholders and is generally taxed at the corporate rate, which can be higher than an individual investor’s marginal tax rate. However, since the new mutual fund corporation is not expected to have net taxable income, we believe this risk is not significant. Since the corporation is not expected to have net taxable income, we do not expect any of the ETFs to have distributions, similar to how they operate now.
The determination of whether or not an investor should invest in one of these Total Return Index (“TRI”) ETFs should be made after careful consideration of the client’s risk/return objectives. Investors should also always read the ETF’s prospectus before investing. In the case of ETFs from the Total Return Index (TRI) product line-up, these typically generate optimal results when held in taxable, i.e. non-registered accounts where income and dividend distributions would be taxed as earned. That said, all of these ETFs are eligible for registered accounts, including RRSP, RRIFs and TFSAs.
No. There is no plan to create a T-class of these ETFs, since they are not expected to pay any taxable distributions, which negates most of the need to create a T-class structure at this time.
While we don’t expect these ETFs to pay any distributions, there is always the possibility that distributions could be required to be paid. However, we would expect their size and frequency to be much smaller than other types of physically replicated strategies. All distributions from a mutual fund corporation are in the form of Canadian capital gains and dividends.
The major difference between these ETFs and other corporate class funds is that these products will use a synthetic derivatives structure as the portfolio, whereas most other corporate class mandates in Canada utilize a traditional physical strategy, where they own the physical securities of a portfolio.
By using the synthetic derivatives structure, our ETFs will typically only realize income gains and losses from downsizing the derivative contracts and will continue to have additional performance advantages, which include low-tracking error relative to other physically replicated index strategies, as well as similar tax benefits to when they were in a trust structure, since these ETFs are not expected to make regular income distributions.
The synthetic derivatives structure of these ETFs, which utilize swap agreements with major Canadian Schedule 1 Banks, are designed to reduce the likelihood of taxable distributions being paid to unitholders. Instead, the value of any income or dividends generated by the underlying index securities are generally reflected in the net asset value of the ETF (NAV). Under the new corporate structure, nothing about this arrangement will change. However, the TRI ETFs will have the added benefit of being able to aggregate future realized income and capital losses and expenses to offset any potential realized income and capital gains that could result from the settlement or partial settlement of swap contracts.
Mutual funds in Canada (which includes ETFs) are typically set up using either a trust or corporate structure. First established in 1987, mutual fund corporations are structured similarly to traditional corporations. Under one corporate structure, many different investment fund mandates (series) can exist. In the case of ETFs, the different ETFs are all held within the corporate structure, where each ETF is a separate class or series.
Within a Canadian mutual fund corporation structure, only Canadian capital gains and dividends can be distributed to investors. From a tax perspective, any income and foreign dividends generated within any one series of the corporation can potentially be offset by losses and expenses incurred in other series (from a tax perspective), which generally makes the corporate class structure more tax-efficient than a traditional mutual fund trust.
According to Strategic Insight, more than $157 billion is invested in corporate class mutual funds in Canada. It is a widely used structure used by advisors and end-investors primarily for taxable accounts.