Tax Efficiency with Horizons Swap ETFs

Horizons swap-based ETFs offer Canadian investors a way to reduce taxes on investment income, particularly in non-registered accounts. These ETFs use total return swaps to replicate market index performance without issuing taxable distributions, deferring taxes until the ETF is sold. This structure converts income into capital gains, which are taxed at lower rates in Canada. Here are the key points:

• HXT (S&P/TSX 60 Index ETF): Focuses on Canadian equities, defers taxes on dividends, and converts them into capital gains. Ideal for non-registered accounts.
• HXS (S&P 500 Index ETF): Provides exposure to U.S. equities with tax deferral on dividends through a corporate class structure.
• HBB (Canadian Select Universe Bond ETF): Converts taxable bond interest into capital gains, offering tax efficiency for fixed-income investments.

While these ETFs are tax-efficient, they come with risks like regulatory changes and counterparty exposure. They work best for long-term investors in higher tax brackets holding assets in taxable accounts. However, in registered accounts like RRSPs or TFSAs, the tax benefits are less relevant.

Quick Comparison:

ETF	Focus	Tax Treatment	Best Use Case	Key Risk
HXT	Canadian Equities	Converts dividends to capital gains	Non-registered accounts	Regulatory risk
HXS	U.S. Equities	Defers U.S. dividends as capital gains	Non-registered accounts	Currency, regulatory risk
HBB	Fixed Income	Converts bond interest to capital gains	Non-registered accounts	Counterparty risk

Horizons swap ETFs are a strong option for reducing taxes, but investors should weigh the risks and ensure these fit within their broader financial strategy.

This Canadian S&P 500 ETF Doesn’t Even Own the S&P 500 😵 HXS Review

1. Horizons S&P/TSX 60 Index ETF (HXT)

The Horizons S&P/TSX 60 Index ETF (HXT) is designed to replicate the performance of Canada's 60 largest publicly traded companies, such as Canadian National Railway and the Royal Bank of Canada. What sets HXT apart is its unique swap-based structure, offering a tax-efficient alternative to traditional Canadian equity ETFs by deferring taxable distributions. This makes it an appealing choice for investors looking to manage their tax liabilities effectively.

Tax Treatment

HXT takes a different approach to taxation compared to traditional ETFs that regularly distribute dividends. With HXT, taxes are deferred until the units are sold. During the holding period, you won’t receive any taxable distributions. Instead, when you sell, any gains are classified as capital gains rather than dividend income. This is significant because, for Canadian investors, only 50% of capital gains are included in taxable income and taxed at your marginal rate. However, starting January 1, 2026, gains exceeding $250,000 will have a higher inclusion rate of 66.67%[1]. This structure is a core part of Horizons’ strategy to maximize after-tax returns.

Fees and Costs

HXT does come with a management expense ratio (MER), which should be considered alongside its tax savings. While the swap-based structure offers notable tax advantages, investors should compare the total cost of ownership with other options, such as the iShares S&P/TSX 60 Index ETF (XIU). XIU tracks the same index but follows a traditional structure[4]. Additionally, trading costs and bid-ask spreads should be factored in, as even small fee differences can impact overall returns over time.

Portfolio Use Cases

HXT is particularly well-suited for non-registered accounts where tax efficiency is a priority[4]. In contrast, the tax benefits are less relevant for registered accounts like RRSPs or TFSAs, as these accounts already provide tax sheltering.

This ETF is an excellent choice for investors seeking long-term exposure to Canadian equities without the burden of regular taxable distributions. Its tax-efficient design is especially advantageous for individuals in higher tax brackets, helping to boost long-term after-tax returns. In the next section, we’ll explore how Horizons applies a similar approach to the S&P 500 with the HXS ETF.

2. Horizons S&P 500 Index ETF (HXS)

The Horizons S&P 500 Index ETF (HXS) provides exposure to 500 leading U.S. companies, including giants like Apple, Microsoft, and Amazon. What sets HXS apart is its tax-efficient swap structure, which allows investors to defer taxes on dividends - a unique alternative to traditional S&P 500 ETFs.

Tax Treatment

HXS takes advantage of a corporate class structure to offer tax deferral benefits. Unlike conventional S&P 500 ETFs that issue annual distributions, HXS offsets income with expenses, avoiding regular payouts altogether [2][5]. This setup means taxes on dividends, which typically average just under a 2% yield for the S&P 500 over the past 25 years [2], are deferred until the ETF is sold. At that point, any gains are taxed as capital gains, which is generally more favourable for Canadian investors. This feature makes HXS particularly appealing for those holding it in non-registered accounts, as it eliminates the need to pay annual taxes on dividend income [3][2].

Fees and Costs

HXS charges a management fee of 0.10%, plus applicable sales tax, resulting in a management expense ratio (MER) of 0.11% as of December 31, 2024 [6]. Additionally, the ETF has a Trading Expense Ratio (TER) of 0.29% for the same period, with a swap fee of up to 0.50% [6]. Effective January 1, 2025, the swap fee increased to 0.50%, contributing to the higher TER [8][9][10].

For comparison, the Vanguard S&P 500 Index ETF (VFV) offers a lower MER of 0.09% [7]. However, VFV lacks the tax deferral benefits that HXS provides, especially for investors in higher tax brackets holding the ETF in non-registered accounts. These cost considerations make HXS a strong contender for those prioritizing tax efficiency.

Portfolio Use Cases

HXS is designed with tax efficiency in mind, making it ideal for non-registered accounts where minimizing annual tax burdens is a priority. In registered accounts like RRSPs or TFSAs, where tax sheltering is already provided, these advantages become less impactful [4].

As of July 23, 2025, HXS has net assets of $4,580,773,067 and an average daily trading volume of 149,202 over the past 12 months, ensuring ample liquidity for most investors [6]. The ETF is best suited for long-term holding, allowing the tax deferral benefits to accumulate over time. Unlike Horizons' HULC ETF, which holds stocks directly and incurs non-recoverable foreign withholding tax on dividends, HXS uses swaps to deliver total returns more efficiently [2]. This structure makes it an attractive choice for investors seeking broad U.S. market exposure while avoiding the tax inefficiencies associated with traditional dividend-paying ETFs.

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3. Horizons Canadian Select Universe Bond ETF (HBB)

The Horizons Canadian Select Universe Bond ETF (HBB) offers a unique, tax-efficient approach to Canadian fixed income investing. By using a swap-based structure, it provides exposure to a broad mix of Canadian government and corporate bonds while converting taxable interest income into capital gains, which are taxed more favourably.

Tax Treatment

HBB addresses a key tax issue for non-registered bond investors. Traditional bond ETFs distribute taxable interest annually, but HBB uses a total return swap to transform this interest into capital gains. This allows taxes to be deferred until the ETF is sold, giving investors more control over when they face a tax liability.

This tax deferral is particularly beneficial for investors in higher tax brackets holding bonds in non-registered accounts [11]. Unlike traditional bond ETFs, which impose a tax burden regardless of cash flow needs, HBB's structure offers significant flexibility and can result in a lower effective tax rate. Next, let’s take a closer look at the fees associated with HBB.

Fees and Costs

HBB has a management fee of 0.09%, along with a swap fee of up to 0.30%, resulting in a total cost of approximately 0.40% [5][13]. As of 23 July 2025, the ETF reports an expense ratio of 0.10% and manages assets worth $3,046.20 million [12].

ETF	Management Fee	Additional Fees	Total Cost	Tax Efficiency
HBB	0.09%	Swap fee up to 0.30%	~0.40%	High
ZDB	0.10%	Trading expense 0.00%	0.10%	Moderate
ZAG	0.09%	N/A	0.09%	Low

Although HBB's costs may seem higher compared to other bond ETFs, these fees are often outweighed by the tax advantages it provides, especially for those in higher tax brackets [13]. This tax efficiency can translate into better after-tax returns when compared to more traditional options [11].

As of 30 June 2025, HBB's tracking difference is recorded at -0.36% [12], which reflects the combined impact of its fees and the effectiveness of its swap structure in mirroring index performance.

Portfolio Use Cases

Thanks to its tax deferral benefits and cost structure, HBB plays a distinct role in taxable portfolios. It is particularly effective in non-registered accounts, where its tax advantages shine. In contrast, these benefits are less impactful in registered accounts like RRSPs or TFSAs, as they already provide tax sheltering.

HBB is especially well-suited for high-income investors seeking Canadian bond exposure. By deferring taxes until the ETF is sold, it can enhance after-tax returns in taxable portfolios. However, it’s important to keep an eye on swap fees and the financial health of the ETF provider to ensure these tax advantages remain viable [13]. While the corporate class structure enabling these benefits carries some regulatory risks, it has remained stable for Canadian swap-based ETFs.

With its ability to deliver efficient Canadian bond exposure, HBB stands out as a compelling choice for taxable investors looking to optimise their returns.

Advantages and Disadvantages

Building on the tax efficiency and fee structures discussed earlier, Horizons swap-based ETFs offer distinct benefits while presenting some trade-offs that Canadian investors should weigh carefully.

Key Benefits

Horizons swap-based ETFs stand out for their tax efficiency and competitive fees. The main advantage is the tax deferral feature, which can be especially appealing for high-income investors in non-registered accounts. By deferring taxes, investors can potentially enhance their long-term returns, as less money is lost to taxes in the short term.

These ETFs also maintain low management fees compared to traditional ETFs, particularly when factoring in the tax deferral benefits. However, these advantages come with a set of risks that investors need to understand.

Notable Drawbacks

One significant concern is regulatory risk. As mentioned earlier, tax-advantaged investment structures like these could face changes in government regulations. Horizons addressed this in a press release, stating:

The corporate class structure is expected to preserve all of the benefits offered by these ETFs under their synthetic investment strategies

• though they acknowledge that this is not guaranteed[3].

Counterparty risk is another factor to consider. While Canadian regulations limit derivative exposure, there is still a risk associated with the financial institutions that facilitate these swaps. Jaime Purvis, Executive Vice-President of National Accounts for Horizons ETFs, noted:

The worst case scenario, then, would be a single catastrophic bank failure during a robust bull market. And even then, that just applies to the gains that you have made. It has nothing to do with the principal

[14].

Concentration risk is also worth mentioning. Relying on a single provider means that any regulatory changes or issues specific to that provider could impact all three ETFs at once[15].

Comparative Analysis

ETF	Management Fee	Tax Efficiency	Best Use Case	Key Risk
HXT	0.03%	Highest	Non-registered Canadian equity	Regulatory risk
HXS	0.10%	Highest	Non-registered US equity	Currency and regulatory risk
HBB	0.09%	High	Non-registered fixed income	Complexity and counterparty risk

Portfolio Fit Considerations

These ETFs are particularly well-suited for non-registered accounts, especially for investors in higher tax brackets who stand to gain the most from tax deferral. However, in registered accounts like RRSPs or TFSAs, where taxes are already deferred, traditional ETFs may be a better fit due to their lower costs and simpler structure.

Investment horizon is another key factor. For short-term investors, the tax deferral benefits might not outweigh the added complexity. On the other hand, long-term investors could see meaningful after-tax returns over time by using these products.

For those who are uncomfortable with the use of derivatives or wary of potential regulatory changes, traditional ETFs that directly hold the underlying assets could be a safer alternative[14][16]. Ultimately, your decision should align with your tax situation, risk tolerance, and preference for simplicity versus the potential for tax optimization.

Conclusion

Horizons swap-based ETFs provide a tax-efficient option for non-registered Canadian investors. Unlike traditional ETFs, these funds allow you to defer taxes until you sell your shares, avoiding the annual tax hit on distributions. This structure makes them particularly attractive for individuals in higher tax brackets, as it enables tax deferral and potential compounding over time.

That said, if your dividend distributions are relatively small, sticking with traditional ETFs and using dividend reinvestment plans might be a more straightforward choice.

It’s important to note that these tax advantages hinge on current regulations. Any changes to tax laws or regulatory policies could affect the benefits. Horizons themselves have acknowledged this in a press release, stating their expectation to maintain these benefits under their synthetic strategies:

The corporate class structure is expected to preserve all of the benefits offered by these ETFs under their synthetic investment strategies, including minimal tracking error, tax efficiency and competitive fees.

[3]

While these ETFs can be a smart tool for tax deferral, they’re most effective when used alongside a broader investment strategy that includes registered accounts like RRSPs and TFSAs. As with any complex investment product, it’s essential to fully understand how they work and the risks involved.

FAQs

What are the tax advantages and risks of Horizons swap-based ETFs compared to traditional ETFs?

Horizons swap-based ETFs are built to offer a tax-efficient alternative to traditional ETFs. They achieve this by minimizing taxable events like capital gains distributions. Instead of directly holding the underlying assets, these ETFs use swap agreements to mirror the performance of an index.

That said, these ETFs come with a level of counterparty risk. Essentially, they rely on financial institutions to fulfil their obligations under the swap agreements. While regulatory measures help keep this risk low, it's still something investors should weigh carefully.

For Canadian investors, especially those with non-registered accounts, the tax advantages of Horizons swap-based ETFs can make them an attractive option for maximizing after-tax returns.

How could regulatory changes affect the tax benefits of Horizons swap ETFs?

Regulatory changes might impact the tax benefits associated with Horizons swap-based ETFs. For example, if stricter rules around disclosure or changes to the tax treatment of swap arrangements are introduced, it could affect their attractiveness to Canadian investors.

The Canadian Securities Administrators (CSA) routinely review ETF regulations to ensure they align with current standards. Any adjustments to these rules could influence the tax efficiency or operational framework of swap ETFs. Investors should keep an eye on these regulatory updates to understand how they might affect their investment strategies.

When might Horizons swap ETFs not be the best choice for Canadian investors?

Horizons swap ETFs may not be the right fit for every investor. For starters, if you value direct ownership of assets, these ETFs might not match your preferences. Instead of holding the actual securities, they operate through swap agreements, which could feel less tangible for some.

These ETFs are also not ideal for short-term traders. Their structure is geared towards long-term tax efficiency, so frequent trading might not yield the desired benefits.

Another point to consider is counterparty risk. Since these ETFs rely on financial institutions to honour swap agreements, there’s always a chance - however small - that a counterparty could default. Lastly, shifts in tax or regulatory policies could reduce the benefits of swap-based ETFs, potentially affecting their appeal to certain investors.

It’s important to weigh your goals and comfort with risk before deciding if these ETFs align with your investment strategy.

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