Swap Based ETFs Explained

A reader question asking about Swap-Based ETFs and whether they are a smart move for Canadians. With a bit of searching around on the Internet, the simplest explanation for what they are and their advantages is here: Canadian Couch Potato- Understanding Swap-Based ETFs. They are basically a vehicle to reduce taxes within an investment portfolio. I myself do not hold any of them, but they seem like potentially a good idea and I plan to do a bit more research about it.

Read the entire article (it’s short!), but the key point here seems to be this:

“It’s important to understand that the dividend portion of the returns compounds inside the ETF, and when you sell your units, you will pay capital gains taxes. That means your taxes are deferred, not avoided entirely. However, capital gains are usually taxed at a lower rate than dividends, and they are taxed at just half the rate of regular income. So investors are likely to enjoy a significant tax benefit over their entire holding period.”

Of course, taxes on dividend and capital gains are subject to change, so you’ll need to stay informed about this. Thanks Canadian Couch Potato for the helpful post!

Andrew Hallam seems to like swap based ETFs as well.

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