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By MoneySense Editors on February 27, 2023
By MoneySense Editors on February 27, 2023
Swap-based ETFs are built differently than other kinds of ETFs. How differently? Learn how they work in the MoneySense Glossary.
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Swap-based ETFs are a type of exchange-traded fund (ETF) that doesn’t directly hold stocks or bonds. The fund uses a “total-return swap” that delivers the same performance as an index, but without actually investing in any of the companies listed on the index. These funds don’t pay dividends or interest like a typical ETF, so they can be more tax-efficient because you don’t pay any taxes while you hold the units in the fund. When you do sell, you will pay capital gains tax on any earnings.
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Example: “Swap-based ETFs do not pay dividends or interest in cash.”
Read more on swap-based ETFs:
- Understanding swap-based ETFs
Last fall, Horizons Exchange Traded Funds launched two innovative new ETFs. Rather than simply holding the stocks in the indexes they track, these funds use a derivative called a “swap” to get exposure to the market. While swap-based ETFs are new to Canada, they’ve been popular in Europe for years. - Swap-based ETFs: What are the risks?
Many investors are understandably concerned about the risks involved in these rather complicated funds, which get exposure to equity indexes without actually holding the underlying stocks. - What are the pros and cons of swap-based ETFs?
Swap-based ETFs don’t hold stocks or bonds directly. This may make them riskier than regular ETFs in a Couch Potato portfolio.
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