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The ETF Lab
ETF Spotlight: Why Canadian investors should buy Canadian (ETFs)
Several US-listed ETFs have become short-hand for the asset class itself and have at times been used by Canadian investors as well. However, oftentimes it may be more suitable and cost effective (after considering potential foreign withholding tax implications, currency conversion costs etc.) to use Canadian-listed ETFs instead.
A summary table of popular US-listed ETFs and potential Canadian-listed alternatives from Mackenzie Investments is below. We also delve into several topics that have made Canadian-listed ETFs more attractive for Canadian advisors and their clients.
Source: Mackenzie Investments
Mitigating US withholding taxes on ETF positions:
Why foreign withholding taxes matters for ETF investors?
ETFs can provide cost-effective exposure to global bonds and/or stocks. However, Canadian investors should be aware of the withholding tax that can occur in some situations.
Most countries levy a tax on dividends paid to foreign investors; for instance, the US government levies a 15% withholding tax on distributions paid to taxable Canadian investors.
Investors receive distributions after the withholding tax has been applied, thus this impact can often go unnoticed.
Canadian investors purchasing ETFs that invest in non-domestic equities or bonds should consider this withholding tax impact along with other cost considerations like management and trading fees.
For a more detailed look into this impact, see our white papers on this topic:
Minimizing this tax drag:
The amount of withholding taxes payable will generally depend on two factors:
- The fund/ETF structure
- The account type (TFSA/Taxable account/RRSP) that the ETF/fund is held in
Canadian ETF investors generally have three structures available to them:
- A US-listed ETF that invests in international securities
- A Canadian-listed ETF that holds US-listed ETFs which invests internationally
- A Canadian-listed ETF that invests directly in international securities
An illustrative example: EM debt
As an example, consider EM debt ETFs. Here, the withholding tax is first applied by the country the bond originates from. After this first level of withholding tax is applied, the US applies an additional withholding tax on distributions made by the US-listed ETF to Canadian investors.
In contrast, QEBH – (Mackenzie Emerging Markets Bond Index ETF (CAD-Hedged)) holds the underlying bonds directly, resulting in one less layer of unrecoverable foreign withholding taxes across all account types.
Below is an estimate of the impact of withholding taxes on Canadian investors (at Level 2 for taxable accounts*):
Source: Bloomberg, Mackenzie Investments; as of January 18, 2023; additional withholding tax is estimated by taking 15% from the trailing 12MTH yield x $1,000,000 (and adjusted for holding period).
*Please note this is for demonstration purposes only. Actual tax amounts will depend on the individual. This should not be construed to be legal or tax advice, as each client’s situation is different. Please consult your own legal and tax advisor.
For Canadians, by Canadians
US-listed ETFs are constructed first and foremost with US investors in mind. For instance, several large ETFs aiming to provide ‘international’ equity exposure may have a significant allocation to Canadian stocks, thereby duplicating the allocation Canadian investors likely already have through other funds and/or ETFs. In contrast, ETFs like QDX - (Mackenzie International Equity Index ETF) provide true international (ex-North America) exposure for Canadian investors.
CAD-hedged currency options
Another benefit of using Canadian-listed ETFs is the availability of CAD-hedged ETFs, particularly on the global bond side. Most index ETFs in Canada that provide exposure to non-domestic fixed income assets are hedged. This is because, when buying fixed income, investors generally tend to expect lower returns but higher certainties on the outcome, when compared to equities.
For more on CAD-Hedged ETFs, see our article: How and when should you use Canadian-Hedged US equity ETFs?
Concluding thoughts
At Mackenzie Investments, we provide a suite of Canadian-domiciled ETFs, engineered in Canada for the Canadian investor.
Advisors should be aware that some US-listed ETFs may be suboptimal for their Canadian clients due to foreign withholding tax implications, lack of currency hedging options and exposures that are designed for US investors, not Canadian.
For more information on this topic, please contact your Mackenzie wholesaling team.
ETF News & Notes
ETFs thrive in a volatile environment
We’re pleased to release our annual Mackenzie Investments Year-End ETF Report. Despite the historic volatility in equity and bond markets, 2022 Canadian ETF inflows topped $35 billion, while assets under management reached $314 billion.
Michael Cooke, Head of ETFs at Mackenzie Investments, notes that “generally speaking, periods of economic uncertainty and volatility tend to lead to increased ETF adoption as investors seek the benefits that ETFs can provide, such as liquidity, transparency, ease of use and product choice”.
Our report also seeks to look forward into the trends that are set to impact the Canadian ETF market in the years to come. These trends include rising rates making bonds attractive and out-of-vogue sectors making a comeback.
Uncover yield with flexible fixed income
Below is our full suite of active and index fixed income ETFs, sorted by weighted average yield-to-maturity.
Source: Mackenzie Investments, all data as of December 31, 2022
Be sure to join us for our upcoming event ‘Uncover yield with flexible fixed income’ on February 7th, 2023 at 1PM EST. Register here.
Mackenzie Investments wins eight 2022 FundGrade® A+ awards for outstanding investment performance1
Among the eight Mackenzie funds recognized with 2022 Fundata FundGrade A+ Awards were four ETFs all shown below. For more information on any of these ETFs, please contact your Mackenzie wholesaling team.
Source: Mackenzie Investments, as of January 27, 2023
MKB - (Mackenzie Core Plus Canadian Fixed Income ETF) was the winner for the 4th consecutive year in a row. MKB is a core fixed income solution that seeks to maximize return while maintaining a risk profile expected from a high-quality bond portfolio. Over the last five years, MKB has outperformed 94% of peers in the Canadian Fixed Income category as of December 31, 20222.
ETF Flows Update
- The US high yield fixed income ETF category continued its strong start to the year, attracting another ~$160M over the last 10 days.
- US broad market equity index ETFs have seen outflows in recent weeks. US large cap equity ETFs have seen ~$418M in outflows in the last 10 days.
- Buoyed by strong performance, international and EM broad market equity index ETFs have attracted modest inflows, totalling ~$47M and ~$24M respectively over the last days.3
Mackenzie ETF Top Performers
Source:
1: FundGrade A+® is used with permission from Fundata Canada Inc., all rights reserved. The annual FundGrade A+® Awards are presented by Fundata Canada Inc. to recognize the “best of the best” among Canadian investment funds. The FundGrade A+® calculation is supplemental to the monthly FundGrade ratings and is calculated at the end of each calendar year. The FundGrade rating system evaluates funds based on their risk-adjusted performance, measured by Sharpe Ratio, Sortino Ratio, and Information Ratio. The score for each ratio is calculated individually, covering all time periods from 2 to 10 years. The scores are then weighted equally in calculating a monthly FundGrade. The top 10% of funds earn an A Grade; the next 20% of funds earn a B Grade; the next 40% of funds earn a C Grade; the next 20% of funds receive a D Grade; and the lowest 10% of funds receive an E Grade. To be eligible, a fund must have received a FundGrade rating every month in the previous year. The FundGrade A+® uses a GPA-style calculation, where each monthly FundGrade from “A” to “E” receives a score from 4 to 0, respectively. A fund’s average score for the year determines its GPA. Any fund with a GPA of 3.5 or greater is awarded a FundGrade A+® Award. For more information, see www.FundGradeAwards.com. Although Fundata makes every effort to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Fundata.
Mackenzie China A-Shares CSI 300 Index ETF (QCH) was recognized for outstanding fund performance at the 2022 Fundata FundGrade A+ Awards in the Greater China Equity category out of a total of 38 funds. Performance for the fund for the period ended December 29, 2022 is as follows: -21.2% (1 year), 2.0% (3 years) and -0.1% (since inception- February 2018).
Mackenzie Core Plus Canadian Fixed Income ETF (MKB) was recognized for outstanding fund performance at the 2022 Fundata FundGrade A+ Awards in the Canadian Fixed Income category out of a total of 311 funds. Performance for the fund for the period ended December 29, 2022 is as follows: -11.2% (1 year), -1.3% (3 years), 0.8% (5 years), and 1.3% (since inception- April 2016).
Mackenzie International Equity Index ETF (CAD-Hedged) (QDXH) was recognized for outstanding fund performance at the 2022 Fundata FundGrade A+ Awards in the International Equity category out of a total of 399 funds. Performance for the fund for the period ended December 29, 2022 is as follows: -5.9% (1 year), 3.6% (3 years) and 3.7% (since inception- January 2018).
Mackenzie US TIPS Index ETF (CAD-Hedged) (QTIP) was recognized for outstanding fund performance at the 2022 Fundata FundGrade A+ Awards in the Global Fixed Income category out of a total of 286 funds. Performance for the fund for the period ended December 29, 2022 is as follows: -12.4% (1 year), 0.7% (3 years) and 1.6% (since inception- January 2018).
2: Morningstar Direct, peer group: Canadian Fixed Income Category
3: Bloomberg, Mackenzie Investments; as of January 31, 2023
FOR ADVISOR USE ONLY. No portion of this communication may be reproduced or distributed to the public as it does not comply with investor sales communication rules. Mackenzie disclaims any responsibility for any advisor sharing this with investors. Commissions, brokerage fees, management fees, and expenses all may be associated with ETF investments. Please read the prospectus before investing. The indicated rate[s] of return are the historical annual compounded total returns as of January 27, 2023 including in share or unit value and reinvestment of distributions and does not take into account sales, redemption, distribution, or optional charges or income taxes payable by any securityholder that would have reduced returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.
This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of January 31, 2023. There should be no expectation that such information will in all circumstances be updated, supplemented, or revised whether as a result of new information, changing circumstances, future events or otherwise.
The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it. Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in the investment products that seek to track an index. The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the investment fund or asset allocation service or returns on investment in the investment fund or from the use of the asset allocation service. Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in the investment products that seek to track an index.