TSX/60 Index Investing Without the Tax Headaches

I recently had the need to invest in a TSX/60 index ETF in my non-registered (i.e. cash) account. Sounds simple enough: there are lots of TSX/60 index ETFs that fit the bill.

The problem, however, is that the TSX/60 is made up of plenty of dividend-paying stocks, and the entire index actually yields about 2.5% at the time of writing. Holding this in my taxable account would mean paying taxes on those dividends as they roll in. Even automating the reinvestment of the dividends by setting them to DRIP would create the same tax bill.

But surely there’s a way to invest in the TSX/60 index and not take the dividends — just re-invest them automatically? Luckily, there is: it’s called a Total Return ETF and the folks over at Horizon ETFs make just such as product.

Horizon’s HXT product doesn’t actually buy the underlying constituents of the TSX/60 themselves — that would produce actual dividends and still create the taxable income issue described above. Instead, the ETF buys swaps with counterparties (large banks in this case) that mimic the structure of the TSX/60. This tracks the investment gains of the TSX/60 without actually holding the underlying stock.

Being an ETF, HXT does come with a management cost. But that cost is one of the lowest management fees for a TSX index and is currently 0.04% MER (plus HST). Since its inception, total return has mimicked the TSX S&P/60 total return net of management fee perfectly and the fund and, as of writing, has a return of 8.65% if you’d held it for the past decade.

If you’re looking for a way to hold the TSX/60 in your non-registered account without the pain of manually reinvesting or using DRIPs and in a tax-efficient way, HXT can supercharge your portfolio.

The content on this site is for informational and educational purposes only and is not intended as a substitute for professional financial advice. Always consult with a licensed financial or tax advisor before making any decisions based on the information you read on this blog.

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