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BXF tears a strip off competitors

Last year, I calculated the after-tax performance of ten short-term bond ETFs in an attempt to find the most tax-efficient of the bunch. The results were not even close – the First Asset 1-5 Year Laddered Government Strip Bond Index ETF (BXF) beat all other funds by a landslide (for the 2014 comparison, please refer to my past blog post, BXF no longer a strip tease). 

This was no surprise to me. Back in February 2013, First Asset asked Canadian advisors to tell them what’s missing from the ETF landscape. Although much sexier ETFs were proposed by much sexier advisors, I suggested a boring tax-efficient strip bond ETF…and somehow won (maybe having the word “strip” in the title made it sound sexier than it actually was). 

Fast forward three years. BXF has the lowest assets under management of all its peers, at a modest $62 million. It’s like watching your kid being picked last in sports. There’s only one difference – BXF is the better player (full disclosure: I was always picked last in sports – oh, and some of our PWL clients hold BXF).

Although it may not be the biggest ETF on the street, BXF has once again shown Canadian investors that size doesn’t matter. Not only did BXF have an after-tax return in 2015 that was more than a percent higher than the runner-up, it had a tax cost ratio of just 0.40% (a fund’s tax cost ratio is similar to a management expense ratio, but for taxes paid instead of management fees paid). It continues to gain recognition in 2016, when it was added to MoneySense’s ETF All-Stars list (Dan Bortolotti and I were part of the voting panel).

For investors who are looking for short-term tax-efficient bond exposure, BXF is expected to be the superior choice for taxable accounts. Investors and their advisors who ignore this innovative and simple product will likely continue to pay unnecessary taxes.

2015 Before-Tax and After-Tax Returns

Short-Term Bond ETF AUM (millions) 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) $62 2.77% 2.36% 0.40%
BMO Short Federal Bond Index ETF (ZFS) $242 2.26% 1.24% 1.00%
Vanguard Canadian Short-Term Bond Index ETF (VSB) $806 2.41% 1.10% 1.28%
iShares Canadian Short Term Bond Index ETF (XSB) $2,265 2.33% 0.97% 1.33%
BMO Short Provincial Bond Index ETF (ZPS) $315 2.59% 0.99% 1.55%
Vanguard Canadian Short-Term Corporate Bond Index ETF (VSC) $731 2.55% 0.88% 1.63%
iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (XSH) $411 2.62% 0.93% 1.65%
iShares 1-5 Year Laddered Government Bond Index ETF (CLF) $1,079 2.56% 0.76% 1.76%
BMO Short Corporate Bond Index ETF (ZCS) $883 2.58% 0.76% 1.78%
iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO) $2,091 2.14% 0.03% 2.06%

Sources: CDS Innovations, BlackRock Canada, BMO Asset Management, First Asset ETFs, Vanguard Investments Canada, Canadian Portfolio Manager

By: Justin Bender | 6 comments

Don’t discount ZDB just yet

In February 2014, BMO released a more tax-efficient version of their flagship BMO Aggregate Bond Index ETF (ZAG). They called their new fund the BMO Discount Bond Index ETF (ZDB). The fund’s strategy was to buy Canadian government and corporate bonds that were trading at par or at a discount to their par value (for a more detailed discussion of ZAG vs. ZDB, please refer to Dan Bortolotti’s blog post, New Tax-Efficient ETFs from BMO). By purchasing lower coupon bonds, the ongoing interest received would be lower than traditional bond ETFs, resulting in a relatively lower tax liability for taxable investors). Clever strategy in theory, but let’s see whether this more tax-efficient structure actually worked out for investors.

The Results

Using my after-tax rate of return calculator, I’ve compared the returns of five plain-vanilla broad market bond ETFs that were available during the entire 2015 tax year. Before-tax, ZDB returned 3.60%, placing it in first place. After-tax, ZDB maintained its first place ranking, returning 2.52%. Its 2015 tax cost ratio (which is similar to a management expense ratio, but for taxes paid instead of management fees paid) was also the lowest of the group, at 1.04%.


Tax Cost Ratio
BMO Discount Bond Index ETF (ZDB) $184 3.60% 2.52% 1.04%
iShares Core High Quality Canadian Bond Index ETF (XQB) $307 3.38% 1.87% 1.46%
Vanguard Canadian Aggregate Bond Index ETF (VAB) $581 3.48% 1.91% 1.51%
BMO Aggregate Bond Index ETF (ZAG) $859 3.24% 1.61% 1.58%
iShares Canadian Universe Bond Index ETF (XBB) $2,042 3.14% 1.39% 1.70%

Source: CDS Innovations, BlackRock Canada, BMO Asset Management, Vanguard Investments Canada

In the chart above, it is also interesting to note that only $184 million is currently invested within ZDB (which is less than 5% of the total assets under management of all five bond ETFs). Hopefully this analysis will help to alert investors and their advisors to more tax-efficient alternatives to their current fixed income picks. 

By: Justin Bender | 2 comments