With today's launch of Horizons Cdn High Dividend Index (HXH/TSX), the Horizons family of ETFs has put a new twist on investing in dividend-paying Canadian stocks.
The exchange-traded fund, which charges a management fee of 0.10%, doesn't hold stocks. Nor will it distribute dividends or make any other types of distributions.
The ETF obtains its equity exposure through total-return swaps. These derivatives enable the ETF to receive the pre-tax total return of its benchmark index, which is the Solactive Canadian High Dividend Yield Index (Total Return).
In a release, Horizons ETFs Management (Canada) Inc. said that since no distributions are expected to be paid, the ETF will be more tax-efficient for investors who hold it in non-registered accounts.
Under the swap arrangements made with a counter-party, the value of the dividends or other income earned by the underlying index stocks is reflected in the total returns of the ETF. Since there are no portfolio trading costs, Horizons added, the ETF's tracking error in relation to the index is also reduced.
The Solactive index benchmark tracks the performance of 40 of the largest dividend-yielding companies traded on the Toronto Stock Exchange that have a minimum market capitalization of more than $4 billion.
The index divides stocks into three equally weighted industry groups: financial services, energy and a third diversified group that is made up of all other sectors. Each of the three groups must hold no fewer than five and no more than 20 stocks, and the weighting in any one stock is limited to 9.5% of the total portfolio.
