BXF no longer a strip tease

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.

The Results

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 really 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.

2014 Before-Tax and After-Tax Returns

Short Term Bond ETF	1-Year Before-Tax Return	1-Year After-Tax Return (Pre-Liquidation)	Tax Cost Ratio
First Asset 1-5 Year Laddered Government Strip Bond Index ETF (BXF)	3.49%	2.76%	0.70%
Vanguard Canadian Short-Term Corporate Bond Index ETF (VSC)	3.39%	1.84%	1.51%
iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (XSH)	3.39%	1.83%	1.51%
BMO Short Corporate Bond Index ETF (ZCS)	3.25%	1.63%	1.57%
Vanguard Canadian Short-Term Bond Index ETF (VSB)	2.82%	1.58%	1.21%
BMO Short Provincial Bond Index ETF (ZPS)	3.09%	1.54%	1.50%
iShares Canadian Short Term Bond Index ETF (XSB)	2.80%	1.48%	1.28%
BMO Short Federal Bond Index ETF (ZFS)	2.31%	1.25%	1.03%
iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO)	3.32%	1.22%	2.03%
iShares 1-5 Year Laddered Government Bond Index ETF (CLF)	2.94%	1.20%	1.70%

Sources: CDS Innovations, BlackRock Canada, BMO Asset Management, Vanguard Investments Canada, First Asset

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.

Justin Bender
CFA, CFP, B.Comm., Portfolio Manager

With more than a decade of experience managing portfolios, Justin is focused on keeping costs and taxes low for his clients. His skills as an analyst and researcher have made him widely respected in the ETF industry.

Contact Justin