When First Asset created Canada’s first strip bond ETF in 2013, they claimed that the ETF was expected to be more tax-efficient than other short term bond products currently available in the marketplace.
With a full tax year behind us, and armed with a new methodology for calculating the after-tax returns of ETFs, we can put First Asset’s claim to the test. Spoiler alert: the results are not only impressive, but they make you wonder why other firms haven’t followed suit by offering their own brand of strip bond ETFs.
I’ve compared the after-tax returns of ten short term bond ETFs that were available during the entire 2014 tax year. Before-tax, the First Asset 1-5 Year Laddered Government Strip Bond Index ETF (BXF) returned 3.49%, placing it in first place. But the real story is BXF’s after-tax return of 2.76% – not only did it maintain its first place ranking – the runners up were not even close. The 2014 tax cost ratio for BXF (which taxable investors would prefer to be low, as it represents the cost of taxes) is 0.70% – lower than any other short term bond ETF.
The results above should not be considered a fluke – as long as the other bond ETFs continue to have an average coupon that is significantly higher than their yield-to-maturity, BXF will be expected to outperform these plain-vanilla ETFs on an after-tax basis (for more information on this concept, please read Why Use a Strip Bond ETF? by Dan Bortolotti). Hopefully the analysis above will encourage taxable investors to look for more tax-efficient alternatives to the short term bond ETFs that they currently hold in their taxable accounts.