Taxation and ETFs

Water Cooler Investing
#1

I’m a big fan of defined strategy ETFs as inexensive ways for individuals to construct portfolios. My personal favourite is BMO’s low vol (I’m in Canada…) ETF, ZLB. It has crushed the TSX (even well before oil tanked), addresses the huge imbalance between financials/energy (the TSX is a combined 56% energy and financials using GICS sectors). BMO’s ZLB ETF is 36%. The energy component better represents integrated E&Ps/pipelines relative to the TSX and non-bank financials. It’s much better diversified. It also speaks to the outperformance of dividend paying stocks (over long time periods) and if anyone has ever read “The missing risk premium”, it speaks to that as well.

In short, it’s a great way to buy something and forget about it, and potentially even use leverage. It is also rules based with a calendar rebalance. It picks the 40 stocks in the TSX top 100 largest, most liquid stocks (not sure how they weight those criteria though) with the lowest 5 year beta, weighting more recent data heavier (Kalman filter). Sector exposure is limited to 35% and security exposure is 10%. Portfolio is rebalanced semi-annually.

Anyway, I love it and recently bought. My question: does the ETF rebalancing trigger a tax event in Canada? Or is it just if the individual sells shares in the ETF?

Thanks,

M

#2

What type of account do you have the ETF in? And who is the broker / dealer?

#3

The rebalancing of the ETF will not have any tax implications, its simply restructuring the percentages with respect to the holdings.

If you are holding the ETF in a registered plan (RRSP, LIRA, RRIF, TFSA etc) then you really don’t need to worry about the tax reporting.

If you are holding the ETF in a non-registered account (Open acct) some broker dealers provide year-end capital gains loss reporting while other don’t. In the latter, this means you have to keep track of this on your own (or your Accountant).