Horizon’s All-in-One Portfolios via Super Tax Efficient ETFs

The train keeps rolling with the index investing posts.  If you’ve been following lately, I’ve been focused on showing readers how to easily invest using the index investing strategy.  Articles such as:

For the ultimate easy DIY portfolio, I have been recommending the Vanguard all-in-one ETF portfolios that will give you global diversification at a very low cost.  Simply buy and forget with rebalancing completed automatically.

Vanguard has introduced all-in-one ETFs that give Canadian investors global diversification for a relatively low management expense ratio.  There are three options:

  1. VCNS – 40% equity/ 60% fixed income
  2. VBAL – 60% equity/ 40% fixed income
  3. VGRO – 80% equity / 20% fixed income

It is common to put these all-in-one ETFs in a registered (tax sheltered) account due to the taxation of the distributions and the regularly occurring automatic rebalancing (generates capitals gains tax).  But what about in non-registered (taxable) accounts?

Cue the Horizon’s swap-based ETFs.

Horizons has created index ETFs that pay 0% in distributions or dividends. Instead, you will only be taxed with capital gains tax when you sell down the road. The dividends are still there but used to compound instead of being paid out.

This is attractive in that the ETFs can grow tax-free while you are accumulating and earning a salary.  Then, when it comes time for retirement and theoretically lower income, you can sell off small portions of your portfolio and only pay capital gains tax.

Next question is, how exactly are they able to do this?  This involves a complicated financial instrument called swaps.  Essentially, Horizons uses National Bank as a counter-party to deliver the returns of the index.  So if the TSX 60 (Canadian large cap index) returns 5%, then National Bank is responsible for paying Horizons 5%.  Sounds risky?  It’s actually not as risky as the word “swap” sounds.  If National Bank defaults on their payment to Horizons, then it’s only the gain that is at risk, not the original invested amount.  Also, if National Bank defaults, we likely have bigger problems in the Canadian stock market, and no returns would be given to Horizons.

Up until recently, Horizons only offered individual ETFs in which you could build a tax-efficient portfolio as follows:

  • Canadian Index (TSX 60): HXT (MER: 0.07% reduced to 0.03% until Sept 2018)
  • US Index (S&P 500): HXS (MER: 0.40%)
  • International Index (MSCI EAFE):  HXDM (MER: 0.50%)
  • Canadian Bond Index: HBB (MER: 0.24%)

If you had 25% of each ETF, the total portfolio would cost about 0.30% which is not bad for a tax-efficient portfolio.  Having the option of using these ETFs adds another weapon in overall tax planning.

Horizons One-Ticket ETF Solutions

Horizons has taken it one step further and has created their own version of an all-in-one portfolio with automatic rebalancing using their own ETFs without any extra management fees.  As of today, they offer two different one-ticket ETF solutions (website).

Horizons ETFInvestment objectiveTickerStrategic asset allocation
Horizons Conservative Total Return Index (TRI) ETF PortfolioTo seek moderate long-term capital growth using a conservative portfolio of exchange traded funds.HCON50% equity/
50% fixed income
Horizons Balanced TRI ETF PortfolioTo seek long-term capital growth using a balanced portfolio of exchange-traded fundsHBAL70% equity/
30% fixed income

The Holdings

HCON – Horizons Conservative TRI ETF Portfolio (50% equity/50% fixed income)

  • 7.1% HXT – S&P/TSX 60 Index ETF (MER: 0.07%)
  • 16.4%  HXS – S&P 500 Index ETF (MER: 0.40%)
  • 12.1% HXQ – NASDAQ-100 Index ETF (MER: 0.625%)
  • 3.6% HXX – EURO STOXX 50 Index ETF (MER: 0.47%)
  • 10.7% HXDM – INTL Developed Markets Equity Index ETF (MER: 0.50%)
  • 33.3% HBB – CDN Select Universe Bond ETF (MER: 0.24%)
  • 16.7% HTB –  US 7-10 Year Treasury Bond ETF (MER: 0.20%)
  • Overall HCON MER: 0.33%

Diversification by Country

  • 41% Canada
  • 45% USA
  • 14% Developed International

HBAL – Horizons Balanced TRI ETF Portfolio (70% equity/30% fixed income)

  • 10.0% HXT – S&P/TSX 60 Index ETF (MER: 0.07%)
  • 23.0%  HXS – S&P 500 Index ETF (MER: 0.40%)
  • 17.0% HXQ – NASDAQ-100 Index ETF (MER: 0.625%)
  • 5.0% HXX – EURO STOXX 50 Index ETF (MER: 0.47%)
  • 15.0% HXDM – INTL Developed Markets Equity Index ETF (MER: 0.50%)
  • 20.0% HBB – CDN Select Universe Bond ETF (MER: 0.24%)
  • 10.0% HTB –  US 7-10 Year Treasury Bond ETF (MER: 0.20%)
  • Overall HBAL MER: 0.37%

Diversification by Country

  • 30% Canada
  • 50% USA
  • 20% Developed International

View the Best All-in-One ETFs in Canada

View our comprehensive comparison of the best all-in-one ETFs in Canada to decide which is best suited for your needs.

Final Thoughts

As you can see from my previous articles, I’m enamoured by Vanguard’s all-in-one ETFs due to the low cost (0.25%) and global diversification.  I really like the Vanguard products inside a tax-sheltered account like an RRSP/TFSA/RESP.  Horizons shines bright when you have maxed out your tax-sheltered account and have money to create a taxable portfolio.  Their swap-based ETFs allow for the distributions to be added to the return of the ETF which is only taxable when you sell (capital gains tax).

While I really want to love these new Horizons one-ticket solution ETFs, I can’t say that I completely recommend them.  The main reason is that since they automatically rebalance on a regular basis, it means that it will generate capital gains tax on a regular basis.  Capital gains within a long-term portfolio, although fairly cheap compared to income tax, will create a small drag on the portfolio.

Second, they could have been more efficient with the holdings within the portfolios. For example, the NASDAQ ETF (with its high MER) holds all of the largest technology stocks in the US, but then, so does the S&P500 ETF.

Personally, I think an investor would be better off building their own Horizons portfolio, rebalancing when adding new money to the portfolio, and selling only when you absolutely necessary.  For completeness, here is the portfolio that I would go with within a non-registered portfolio.

  • Canadian Index (TSX 60): HXT (MER: 0.07% reduced to 0.03% until Sept 2018)
  • US Index (S&P 500): HXS (MER: 0.40%)
  • International Index (MSCI EAFE):  HXDM (MER: 0.50%)
  • Canadian Bond Index: HBB (MER: 0.24%)

For ultimate efficiency, consider opening a non-registered account with a brokerage that allows you to trade ETFs commission-free.  I semi-recently opened a non-registered account with Questrade for my wife (her TFSA and RRSP already maxed out) for this purpose.

What is your ETF strategy?  Have you simplified with all-in-one products yet?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Eric M
4 years ago

Three years ago I opened up in-trust investment accounts for my 3 kids. I chose to diversify with the Horiozon ETFs to simplify tax purposes. There is about $2000 in each. If my kids are 11, 9, 6, and I plan to let them have the funds when they are 18 -22 range, what type of capital gains / tax implications would be involved. Do I get taxed at withdrawal or would they be taxed when adults. Is is better to withdrawal while when they are 18-24 and still in school with low annual income, or better if they continue to hold the investment as long as they want.

5 years ago

Hi FT,

This is great info, thanks. I’m taking my first steps to starting my own investments at 56, mainly because you and other money bloggers bought to my attention the horrendous fees I’m paying in my current RRSP with Investors Group. I’ve had some good advice from them but paying 2.33% fees on my mutual funds is way too much. Shame on me for not catching it earlier. The Questrade account is open, the first money will go in shortly. I’m still not sure about some stuff, like why you need to rebalance, and I think with an RRSP I am obliged to maintain a certain percentage of Canadian stock, but I can pick up that as I go with some more reading. Thanks to you and the other determined investors here!

Marc Agapay
5 years ago

I’m just curious what’s FT’s thought why he is not considering to have “US 7-10 Tresury Bond ETF” in his personal pick of index from Horizon’s. Thank you.

Raymond Massé
5 years ago

Why I prefer the Horizon approach in asset allocation ? Quite simple : compare VGRO, from Vanguard, to HBAL, from Horizon. They have roughly the same asset allocation, BUT, instead of holding up to 24% of Canadian Equity in their portfolio, it’s 10%. We all know that our market’s share is smaller than this (around 3%). Why then putting so much emphasis on Canadian market ? (talking here about Vanguard). The same thing occurs with Blackrock and their CBN’s etf, by the way

Sanjay Kandpal
5 years ago

Thanks for the blog. What % you would suggest for HXT/HXS/HXDM/HBB in non-registered portfolio?

5 years ago

The HXT is a good strategy for people who don’t want to have income in their corporation :)

One risk with swap based ETFs is that the Canadian government could swoop in and kill the tax beneficial swap structure (which they might since they want to tax Canadian taxpayers to the nines ;) )

Financial newbie
5 years ago
Reply to  FT

If this happens, what would the risk be? End up paying back taxes that you would have paid anyway? I’m seriously considering using the horizon ETF’s in my non-registered as I’ve long since run out of room in my registered accounts and don’t really want to hold bonds in my non-registered or rebalance to increase bonds in my TFSA (most bonds currently in RRSP). But I don’t want to do this if it’s too risky.

5 years ago

I have stuck to a a DIY ETF strategy. I love the idea of an all in one ETF but I don’t want bond exposure.
I am using my TFSA and RRSP for retirement so the time horizon is 30+ years. With that time frame I can handle the volatility of stocks only and hope to make a larger return.

Allan Fefergrad
5 years ago

If these funds are held in a non-registered corporate account, how much more in tax savings would these funds produce over XIU, XAW and ZDB?

Over a 5 or 10 year time horizon will there be any significant differences in the portfolio values?

5 years ago
Reply to  FT

In most cases, the marginal tax rates on capital gains are quite a bit lower than on eligible dividend income. Another win!

Do you see any downsides into why an investor should not make the switch to these Horizon funds in a non-registered account?

5 years ago
Reply to  Allan

Just curious, how would these tax-efficient funds do in a bear market compared to the standard ETF’s that distribute dividends?

5 years ago

Thanks for this! I just opened an unregistered account earlier this year and am using HBB, HXT, HXS and HXDM. I still consider myself kind of new to DIY investing, so it’s nice to see some reinforcement that I’m making some good choices.

5 years ago

I’m curious why they haven’t launched an all equity or 80%/20% like VGRO? I’ve read in many sources that it is more tax efficient to put your fixed income in an RRSP and your equities in taxable accounts. I’ve also read sources like Dan Bortolotti and Justin Bender warn that the government may disallow total return products like these to ensure dividends/interest are paid and taxed annually so there could be a risk to using these.

5 years ago
Reply to  BartBandy

I think part of the reason may be that investors looking for asset location strategies, are likely managing their weightings themselves so they are more likely to be using individual funds, since they likely also want to manage not only want to weight equities in non-registered accounts, but also control the amount Canadian vs non-canadian equities in different accounts.

So in general, I can see why Vanguard isn’t building products geared to that market, since there is probably a good portion of that market where it wouldn’t be a fit, and its far harder to create something very general for that market in particular, since the weightings will heavily depend on what percentage of the total assets are in each type of account.

If anything, I think Vanguard will maybe create an all in one solution aimed at tax efficiency as a whole rather than asset allocation strategies that might be a better fit for people using asset location strategies.

5 years ago
Reply to  Danny

Thanks for the perspective Danny – that makes a certain amount of sense from Vangaurd’s point of view. I guess I would have thought an all equity portfolio would be appealing, as many fund-of-fund offerings offer 100% equity solutions. I like the idea of a tax efficient offering. Let’s hope!

5 years ago
Reply to  BartBandy

I think with Vanguard offering just 3 in the outset they are looking to streamline. I do think they will likely add a more aggressive option, but my guess is it will be 80/20. An 80/20 mix has a better risk adjusted performance than a 100% equity mix, so given that Vanguard has been a bit conservative in not rolling out too many of these options all at once, I think they will likely play it safe when they roll out a more aggressive option and it will probably be something more similar to an 80/20.

I also think at some point they will look at creating a tax efficient product but again their conservative approach leads me to think they will offer it as a solution for those that want one of the pre-packaged portfolios in all their registered accounts, and then a tax-efficient solution in their non-registered.