Horizons launches low-cost Canadian financials and energy sector ETFs

Sep 17th, 2013 | By | Category: Equities

Toronto-based Horizons ETFs has unveiled two new exchange-traded funds that will provide investors with exposure to the two largest sectors of the Canadian stock market – financials and energy.

Horizons launches low-cost Canadian financials and energy sector ETFs

Royal Bank of Canada is the largest holding in the newly launched Horizons S&P/TSX Capped Financials Index ETF, with a weight of approximately 20.4%.

Listed on the Toronto Stock Exchange, the Horizons S&P/TSX Capped Financials Index ETF (HXF) and Horizons S&P/TSX Capped Energy Index ETF (HXE) are linked to the S&P/TSX Capped Financials Index and S&P/TSX Capped Energy Index, respectively.

With annual management fees of just 0.35%, the two funds become the lowest-cost products in their peer group, almost 40% less expensive than the next lowest-cost ETF tracking the same index.

The financials sector is the largest component of the S&P/TSX Composite Index, accounting for nearly one-third of the index’s market capitalisation. Major holdings include Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce.

The energy sector accounts for about one-quarter of the market capitalization of the S&P/TSX Composite Index and is comfortably the second-largest sector in the index, ahead of materials. Major holdings include Suncor Energy, Canadian Natural Resources, Cenovus Energy, Crescent Point Energy and Encana.

Howard Atkinson, President of Horizons ETFs, said: “Whenever we add to our line of index-tracking ETFs, costs are always at the top of our mind. Investors should pay as little as possible for index returns. Other issuers have similar ETFs, but we wanted to bring to market products with lower costs, reduced potential for tracking error and more tax efficiency.”

Both funds employ a total return swap structure to achieve their exposures, which typically allows for lower management fees and greater tax efficiency. Since the value of any dividend distributions paid out by index constituents is reflected in the total return of the index and therefore an ETF’s net asset value, these ETFs do not make taxable distributions of those dividends. Generally, the only tax implications for an individual investor in these funds will occur when they sell their units on an exchange for a capital gain (or loss).

Atkinson explained: “The S&P/TSX Capped Financials Index is a particularly dividend-rich index, delivering an average annual dividend yield of 4% over the last five calendar years. Some Canadian investors could see more than a quarter of those distributions going to taxes. The HXE and HXF structure essentially defers this dividend tax liability, so that individual investors only pay taxes when they sell their ETF units on an exchange for a capital gain.”

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