Horizons ETFs has announced it will reduce the management fee on the Horizons Canadian Select Universe Bond ETF (Toronto: HBB) from 0.15% to 0.09% as of 1 July 2017.

Steven Hawkins, president and Co-CEO of Horizons ETFs.

The fund tracks the performance of the Solactive Canadian Select Universe Bond Index (Total Return), designed to measure the performance of the Canadian investment-grade fixed income market.

“With this management fee reduction, HBB now has one of the lowest management fees among the investment-grade bond ETFs in Canada,” said Steve Hawkins, president and Co-CEO of Horizons ETFs. “Keeping costs low on fixed income ETFs has never been more important. With a combination of low yields and the always-looming prospect of rising interest rates, it’s essential for Canadian fixed income investors to reduce the cost of their bond exposure to ensure they preserve more of their returns.”

Horizons further notes that by tracking a total return index, the ETF provides enhanced tax-efficient exposure to the total returns of the broad Canadian investment-grade bond market. The fund uses a synthetic replication structure to receive the pre-tax total return of the index. As such, the value of any dividend or interest income is directly reflected in the performance of the ETF, leading to greater tax efficiency for investors who hold the ETF in taxable investment accounts.

“Tax is a big consideration for fixed income investors, since the income generated from bonds is taxed at an investor’s marginal tax rate. For many Canadians, this means losing nearly half their annual yield to income taxes,” said Hawkins. “Instead of paying this tax immediately on income gains, HBB allows investors in non-registered accounts to have the full pre-tax value of those income distributions reflected in the value of the ETF. Investors can essentially defer paying that tax until they sell their units of the ETF.”

While HBB has reduced its management fee to 0.09%, it will still continue to charge an additional swap fee of approximately 0.15%, in order to utilize the tax-advantaged total return structure. This means the total cost of owning HBB is approximately 0.24% per year.

“In our view, even after the swap fee, the after-tax benefits of HBB’s return – deferring taxation on nearly half the yield – provide a net benefit for many investors,” said Hawkins. “It’s important to remember that management fees are only one aspect of the cost of owning an ETF; tax is another significant cost. From that perspective, we believe that HBB is the lowest-cost fixed income ETF in Canada, when held in a taxable account.”