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Here are some more readers’ questions backlogged from 2022. Last time, I answered questions on Firm Capital, inflation-linked bonds, and the wisdom of investing $1 million in one stock. This time, I’ll look at questions on healthcare and TSX index ETFs.
Q – I would like your views regarding these ETFs: Harvest Healthcare Leaders Income ETF (TSX: HHL; TSX: HHL.U). Their yields are about 8%, which is very attractive, and they have a low volatility. I don't have clarity about how much the management fee will reduce the yield. Also, I would like to buy them in my TFSA (in Canadian dollars and U.S. dollars), but I'm not sure that if I buy the HHL.U, the 15% withholding tax be deducted? If the 15% is still withheld, will the yield still be around 6%-7%? – Carolina A.
A – The fund is listed in two currencies. HHL is in Canadian dollars, while HHL.U is in U.S. currency. The fund invests in 20 large-cap healthcare companies from around the world, on an equal-weighted basis. Key holdings include Pfizer, Johnson & Johnson, Stryker, Merck, etc.
HHL has posted a five-year average annual compound rate of return of 7.84% to Jan. 31, and is down 1.02% this year (to Jan. 31). HHL.U has gained an average annualized return of 8.7% over five years and is down 0.95% this year. Based on those results, the U.S. dollar units have done better historically, but that could change any time, depending on the currency exchange rate.
The Canadian dollar units distribute $0.0583 a month, or about $0.70 a year. At a recent price of $7.97, they yield 8.8%. The U.S. units pay US$0.0583 (about US$0.70 a year). HHL.U was recently trading at US$8.34 to yield 8.4%. The Canadian dollar units therefore offer a slightly better yield.
All results are reported net of management fees.
The units in both versions of this fund will be subject to withholding tax in a TFSA or non-registered account because all the stocks are foreign companies. The withholding is the same for both classes of units since they are based on the same portfolio. Note that the 15% is taxed on the underlying dividends of the securities, not on the entire distribution of the fund. Some of the distribution comes from writing covered call options. That portion is generally taxed as capital gains in non-registered accounts but not in TFSAs.
Q – Is HXT a better alternative to the venerable XIU? It seems to have a lower MER and automatically reinvests dividends (so you don’t see any DRIP activity on your account). Is there a catch? – David K.
A – XIU is the symbol for iShares S&P/TSX 60 Index ETF. It invests in a portfolio of large-cap Canadian stocks and has been around since 1999. Performance has been good, with a 10-year average annual compound rate of return of 8.7% to the end of January. The management expense ratio (MER) is 0.18%.
HXT is the trading symbol for the Horizons S&P/TSX 60 Index ETF. That’s the same index as XIU tracks, so it should be no surprise that both hold the same securities in roughly the same proportion. HXT has a slightly better 10-year average annual return, at 9.12%, which would appear to be due in large part to its lower MER of 0.04%. Note, however, that the low management fee is due in part to a rebate of 0.04% that could be withdrawn. Even without that, however, HXT will still be cheaper.
This is an example of how a lower fee can give you a slight edge in returns. It’s not a lot, but over the years it adds up, especially on large amounts of money.
If you have a money question, send it to gordonpape@hotmail.com and write Fund Library Question in the subject line. Sorry, I can’t guarantee a personal response, but I’ll answer as many questions as possible here.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
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Notes and Disclaimer
Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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