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Updated 2mo ago.
Updated 2mo ago.
A swap-based ETF is an ETF that replicates an index without physically holding the underlying securities. Instead, it uses a swap contract with a financial counterparty (usually a bank) that agrees to pay the index return. These ETFs can offer tax advantages in certain structures.
HXS.TO (Horizons S&P 500 Index ETF) is a Canadian swap-based ETF. It distributes no dividends — US stock returns are "swapped" into capital appreciation. In a taxable account, this avoids US withholding tax on dividends AND defers tax until sale. Over 20 years, this advantage can be significant for taxable accounts.
Swap-based ETFs like HXS.TO and HXT.TO (S&P/TSX 60) are particularly advantageous for investors in high tax brackets using taxable accounts. However, they carry counterparty risk (if the bank defaults) and have a more complex structure. For a TFSA or RRSP, physical ETFs like VFV.TO or VEQT.TO are generally sufficient.