Swap ETFs are funds which are structured to convert distributions into capital gains so they can be deferred for tax purposes. Basically the ETF provider has a contract with a partner. When the partner's investments (often a standard ETF or similar basket of stocks) pay a distribution, that distribution is added as an increase in the NAV of the unit rather than being paid out.
To simplify, let's say the NAV of a certain swap ETF tracking the MSCI EAFE Index is $20.00 per unit. The EAFE Index pays a 1% dividend on November 17. Instead of you getting $0.20 tomorrow and having to claim it as income and pay tax on that, the NAV of the swap ETF simply rises to $20.20 per unit. You technically still benefit from the full dividend, but it's just booked differently so you don't have to claim it as income until you sell the unit. Then you only pay tax as a capital gain instead of a foreign dividend. It cuts the tax rate nearly in half.
HXDM.TO would be the international choice for this type of structure. It's brand new so total assets are still a little light. Trading volume is decent though and it trades pretty tight to its NAV.
Interesting, first time I hear about this.
What are the disadvantages then?
Mainly counterparty risk and a somewhat higher MER.
Counterparty risk the implied risk if the investment contractor goes bankrupt (the actual investment is held in trust). This varies from day to day, but usually floats between -1.0% and 2.0%.
The Management Fee on HXDM.TO is 0.20%, which is cheap. The counterparty fee is another 0.30%, but this is not necessarily reflected in the return. You will typically find that Horizons swap products track very close to or even better than comparable standard ETFs over extended periods of time.
Before going international in your NR, you might be better to take the first step of optimizing your ETFs by account type as R-C suggests.
