• Investment Taxation

BXF no longer a strip tease

When First Asset created Canada’s first strip bond ETF in 2013, they claimed that the ETF was expected to be more tax-efficient than other short term bond products currently available in the marketplace.

With a full tax year behind us, and armed with a new methodology for calculating the after-tax returns of ETFs, we can put First Asset’s claim to the test.  Spoiler alert:  the results are not only impressive, but they make you wonder why other firms haven’t followed suit by offering their own brand of strip bond ETFs.

The Results

I’ve compared the after-tax returns of ten short term bond ETFs that were available during the entire 2014 tax year.  Before-tax, the First Asset 1-5 Year Laddered Government Strip Bond Index ETF (BXF) returned 3.49%, placing it in first place.  But the real story is BXF’s after-tax return of 2.76% – not only did it maintain its first place ranking – the runners up were not even close.  The 2014 tax cost ratio for BXF (which taxable investors would prefer to be low, as it represents the cost of taxes) is 0.70% – lower than any other short term bond ETF.

2014 Before-Tax and After-Tax Returns

Short Term Bond ETF 1-Year Before-Tax Return 1-Year After-Tax Return (Pre-Liquidation) Tax Cost Ratio
First Asset 1-5 Year Laddered Government Strip Bond Index ETF (BXF)




Vanguard Canadian Short-Term Corporate Bond Index ETF (VSC)




iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (XSH)




BMO Short Corporate Bond Index ETF (ZCS)




Vanguard Canadian Short-Term Bond Index ETF (VSB)




BMO Short Provincial Bond Index ETF (ZPS)




iShares Canadian Short Term Bond Index ETF (XSB)




BMO Short Federal Bond Index ETF (ZFS)




iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO)




iShares 1-5 Year Laddered Government Bond Index ETF (CLF)




Sources:  www.canadianportfoliomanagerblog.com, CDS Innovations, BlackRock Canada, BMO Asset Management, Vanguard Investments Canada, First Asset

The results above should not be considered a fluke – as long as the other bond ETFs continue to have an average coupon that is significantly higher than their yield-to-maturity, BXF will be expected to outperform these plain-vanilla ETFs on an after-tax basis (for more information on this concept, please read Why Use a Strip Bond ETF? by Dan Bortolotti).  Hopefully the analysis above will encourage taxable investors to look for more tax-efficient alternatives to the short term bond ETFs that they currently hold in their taxable accounts.


By |2017-01-17T18:01:40+00:00February 25th, 2015|Categories: Investment Taxation|Tags: |11 Comments


  1. Tim August 19, 2015 at 11:21 am - Reply

    Thanks for this post, really helpful.

    In a similar situation as Scotty above, but looking for something to invest in a taxable corporate account. Does corporate taxation put into wrinkles into the tax efficiency of this ETF?

    • Justin August 19, 2015 at 1:28 pm - Reply

      @Tim – BXF could be an option for you as well (depending on your investment horizon). I don’t see any issues arises from holding the security in a corporate account (although you should speak to your accountant regarding your specific situation).

  2. Kay T February 27, 2015 at 12:44 pm - Reply

    @Justin: Looking at First Asset’s website, the BXF distributions are a combination of Other Income and ROC. Is the improved tax efficiency related to the reporting of the ROC on my income tax return? I assume there is nothing fancy to do when filing income tax other than the data reported on the issued ?T3 form from First Asset in order to capture the tax advantage.

  3. Cristian February 27, 2015 at 12:52 am - Reply

    What about comparison of BXF with ZDB?…

    • Justin February 27, 2015 at 9:19 am - Reply

      @Cristian: BXF is a short term bond ETF (average maturity of about 3 years) while ZDB is a broad-market bond ETF (average maturity of about 10 years). They would not be directly comparable.

      However, I may be able to compare a 10-month after tax return between ZDB, ZAG, XBB, VAB, etc. – I’ll keep you posted.

  4. Henry Lee February 26, 2015 at 10:13 pm - Reply

    Excellent article Justin. BTW, would you consider the ETF HBB (Horizons CDN Select Universe Bond ETF) tax efficient? It “converts” interest income into capital gains which is taxed at a lower rate. I have considered BXF in the past but the trading volume is so low and inconsistent that it scares me. Should I be concerned about this? Given its tax efficiency, do you think it’s even worth considering inside a RSP?

    • Justin February 27, 2015 at 9:17 am - Reply

      @Henry Lee – HBB would be considered tax-efficient (relative to more comparable broad market bond ETFs, like VAB, XBB or ZAG).

      I’ll send a note to First Asset to see if they will comment on your trading volume concern.

      I see no issues with holding it in an RRSP, although I would probably just go with an even lower-cost plain-vanilla short term bond ETF (since tax-efficiency is not an issue).

    • Barry Gordon March 4, 2015 at 9:15 am - Reply

      Hi Henry. Your question about trading volume is a common one, particularly for newer or smaller ETFs. One of the great things about ETFs is that the liquidity of the ETF is driven by the liquidity of the underlying holdings, which is reflected in the bid/ask spread of the ETF. So, unlike a stock, where the historical volume is used as a proxy for liquidity, the bid/ask spread and the size that is bid/offered gives you a better picture of an ETFs liquidity. In the case of BXF, it typically is quoted 2 cents wide, with between $500,000-$750,000 bid or offered. You can feel very comfortable trading in amounts far in excess of that as well. Just in the last two months there was a $10MM block traded and a $2MM block traded. Plenty of liquidity. We stress tested it for exactly this purpose before the ETF was launched. As you can imagine, it does us no good to launch an ETF that nobody could buy or sell! I hope that answers your questions and that you become a BXF convert! BTW, I should have started off indicating that I am the President and CEO of First Asset. Let us know if you have any other questions.

  5. Scotty February 25, 2015 at 5:27 pm - Reply

    Thanks for the post Justin. I’ve been looking for a relatively safe way to park cash (to be used in 2-5 years) in a taxable account and currently just hold it in a Tangerine ISA. But with rates now hovering around 1.05% (before tax) the lackluster return is starting to bother me. I’ve looked at other options:

    VSB – After the heavy taxation it just isn’t enough return to justify the change
    ZDB – Term is too long for my short term investment horizon
    HBB – Same issue, term is too long
    GIC – Not worth the lack of liquidity

    Makes me wonder if BXF is the answer. Relatively short term, tax efficient, and liquid. Plus an after tax return of >2% seems pretty appealing at the moment.

    • Justin February 27, 2015 at 9:31 am - Reply

      @Scotty – if you need the cash within 2-5 years, ZDB and HBB are likely not appropriate. BXF is expected to be more volatile than other plain-vanilla short term bond ETFs, as the underlying strip bonds do not pay semi-annual coupon interest.

      Also, the high after-tax return is a result of bond yields decreasing in 2014 – the opposite could also happen in future years. Have you considered shopping around for better high interest savings account rates?

Leave A Comment