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How to Calculate the After-Tax Return of an ETF

In our latest white paper, After-Tax Returns, Dan Bortolotti and I explain our methodology for calculating the after-tax returns of Canadian-domiciled ETFs. We were surprised to learn that funds with higher before-tax returns and similar investment strategies could have their fortunes reversed when their after-tax returns were compared instead.

For example, if we compare the before-tax returns of the TD Canadian Index Fund e-Series (TDB900) and the iShares Core S&P/TSX Capped Composite Index ETF (XIC) over the past ten years, we find that investors would have been better served by opting for XIC over TDB900.

Before-Tax Returns as of December 31, 2013

Annualized Return (%) 1-year 3-Years 5-Years 10-years
TD Canadian Index Fund e-Series (TDB900) 12.63 3.12 11.58 7.65
iShares Core S&P/TSX Capped Composite Index ETF (XIC) 12.71 3.14 11.58 7.93
Difference (%) -0.08 -0.02 0 -0.28

Sources: BlackRock Canada, TD Asset Management

If we assumed that the investor held either fund in their taxable account instead (and paid the highest combined marginal tax rate on the income received), we would end up with an entirely different result. TDB900 would be the preferred holding in this case (mainly due to the significant capital gains that XIC distributed between the 2005 and 2007 tax years).
After-Tax Returns as of December 31, 2013

For those investors who are interested in calculating the historical after-tax returns for any Canadian-domiciled ETF, please feel free to download our PWL 2013 After-Tax Rate of Return Calculator. As always, please email us with any questions or comments.

Justin Bender:
Dan Bortolotti:

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