Innovative Tax Efficient Low Cost Bond Solutions
BMO’s Suite Discount Bond ETFs – ZDB, ZSDB & ZCDB
Jan. 5, 2024ZDB, ZSDB and ZCDB can help investors reduce taxable interest income relative to traditional bond funds with similar exposures.
BMO’s Discount Bond ETFs invest in bonds where the current yield is near or below par value. Having the coupon and Yield to Maturity (YTM) aligned can provide investors with greater tax efficiency.
| BMO Discount Bond Index ETF: ZDB Management fee: 0.09% 100% Investment Grade | BMO Short-Term Discount Bond ETF: ZSDB Management fee: 0.09% 100% Investment Grade | BMO Corporate Discount Bond ETF: ZCDB Management fee: 0.15% 100% Investment Grade |
When the coupon is lower than the Yield to Maturity (YTM), that means that the bond is trading at a price that is below par. The advantage of buying an ETF that has a basket of bonds trading at a discount is that a portion of the future return will come from price appreciation (difference between the discounted price and the maturity value of $100) which is treated as a capital gain for tax purposes. In Canada, half of a capital gain is generally tax-free, while the other 50% is added to a taxpayer’s income along with the coupon (interest) income. Therefore, all things being equal, investing in bonds with lower coupons can lead to better after tax returns. See illustration as example.
For taxable clients, tax is based on interest income (coupon earned) not yield, so it is advantageous to hold bonds that have a lower coupon. (example below; click to enlarge).
BMO Discount Bond Index ETF (Ticker: ZDB) has the yield-to-maturity, duration, and sector characteristics designed to approximate the Canadian Aggregate universe.
BMO Short-Term Discount Bond ETF (Ticker: ZSDB) has federal, provincial, corporate, and municipal bonds with a remaining term to maturity between one and five years that are issued in Canada and have an investment grade rating.
BMO Corporate Discount Bond ETF (Ticker: ZCDB) Invests in corporate bonds with a remaining term to maturity between one to ten years that are issued in Canada and have an investment grade rating.
BMO Exchange Traded Funds (ETFs) are experts at understanding how ETFs can complement and enhance portfolio construction. BMO ETFs has the most comprehensive fixed income lineup in Canada with over 50 Fixed Income ETFs, and is the number 1 fixed income ETF provider in Canada based on AUM*.
* Source: NBF ETF Research, Bloomberg October 31, 2023.
Portfolio holdings are subject to change without notice and may not represent current or future portfolio composition. The portfolio data is “as of” the date indicated, and we disclaim any responsibility to update the information. MERs are as of Sept 30, 2020. This communication should not be construed to be legal or tax advice, as each client’s situation is different. Please consult your own legal and tax advisor.
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Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
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Distributions are not guaranteed and may fluctuate. Distribution rates may change without notice (up or down) depending on market conditions. The payment of distributions should not be confused with an investment fund’s performance, rate of return or yield. If distributions paid by an investment fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an investment fund, and income and dividends earned by an investment fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero. Please refer to the distribution policy for BMO ETF set out in the prospectus.
Cash distributions, if any, on units of a BMO ETF (other than accumulating units or units subject to a distribution reinvestment plan) are expected to be paid primarily out of dividends or distributions, and other income or gains, received by the BMO ETF less the expenses of the BMO ETF, but may also consist of non-taxable amounts including returns of capital, which may be paid in the manager’s sole discretion. To the extent that the expenses of a BMO ETF exceed the income generated by such BMO ETF in any given month, quarter or year, as the case may be, it is not expected that a monthly, quarterly, or annual distribution will be paid. Distributions, if any, in respect of the accumulating units of BMO Short Corporate Bond Index ETF, BMO Short Federal Bond Index ETF, BMO Short Provincial Bond Index ETF, BMO Ultra Short-Term Bond ETF and BMO Ultra Short-Term US Bond ETF will be automatically reinvested in additional accumulating units of the applicable BMO ETF. Following each distribution, the number of accumulating units of the applicable BMO ETF will be immediately consolidated so that the number of outstanding accumulating units of the applicable BMO ETF will be the same as the number of outstanding accumulating units before the distribution. Non- resident unitholders may have the number of securities reduced due to withholding tax. Certain BMO ETFs have adopted a distribution reinvestment plan, which provides that a unitholder may elect to automatically reinvest all cash distributions paid on units held by that unitholder in additional units of the applicable BMO ETF in accordance with the terms of the distribution reinvestment plan. For further information, see Distribution Policy in the BMO ETFs’ prospectus.