One actionable investment option during a severe market correction is known as tax-loss harvesting. Canadian ETFs provide ample selection to allow investors to exit a position in one ETF and buy a corresponding ETF with similar exposure. By doing so, investors can potentially harvest capital losses while also maintaining exposure to key long-term sectors.

For added benefit, investors could consider the Horizons ETFs Total Return Index (“TRI”) suite of ETFs as a potential target for maintaining exposure to desired sectors after tax-loss harvesting, as these ETFs offer the added benefit of expected tax deferral on future income. We will address this tax deferral strategy using the TRI ETFs further below.

Tax- Loss Selling 101

Simply put, tax-loss harvesting, or tax-loss selling, is a strategy that can help mitigate capital gains tax. The practice of tax-loss selling involves deliberately selling a stock or fund at a capital loss, where the price at which it is sold is below the adjusted cost base or original purchase price. The aim is to use the loss realized from such a sale to offset any capital gains realized on other investments during the year.

While losing money on an investment is never ideal, a realized capital loss can be useful for those who invest outside of a registered account and are looking for a trading strategy that will help them reduce taxes to be paid on capital gains.

Generally, a realized capital loss can be used to offset realized capital gains in the current year, or it can be carried back as far as three years. It can also be carried forward indefinitely.

There is a caveat, however: Canadian tax law requires that a seller (or an affiliated person, such as a spouse) may not purchase the same security (or an identical security) as the one on which they are claiming a loss within the 30 calendar days before or after the sale of the security in order to be able to claim the full amount of the capital loss on the position.

This is where ETFs may come in handy. You could sell a stock or fund to realize a capital loss and then, during the 30-day waiting period, invest the proceeds in an ETF that tracks that stock or fund’s industry, sector or asset class. After the 30-day waiting period, you could keep the ETF, or sell it and switch back to the security you originally sold to realize a capital loss.

An identical security is one that is so similar to another in substance and structure that the Canada Revenue Agency (CRA) does not recognize a difference between the two, including, but not limited to, new and old securities issued by a corporation that has undergone reorganization.

Investors are rightfully hesitant to sell securities at a loss, because many typically expect the valuations of a security or fund to turn around following a decline. However, investors don’t have to meaningfully exit their exposure when using the tax-loss selling tech- nique.

Consider that, at the time of this writing, the S&P/TSX Composite Index is down approximately 30% on a one-year basis, and now has a more than 15% negative return on a three-year basis (Bloomberg, as at March 20, 2020). Many investors are likely sitting on some losses in Canadian equity holdings. Some investors may be hesitant to sell a particular stock due to its favourable dividend payout throughout the calendar year.

An investor, depending on when they originally bought a Canadian equity ETF – and at what cost – may be able to sell that ETF to crystalize a capital loss and still maintain some exposure to the Canadian equity sector by simply investing in a large-cap Canadian equity ETF, like the Horizons S&P/TSX Capped Composite Index ETF (“HXCN”) or the Horizons S&P/TSX 60 Index ETF (“HXT”). HXCN and HXT are slightly different than other Canadian equity index ETFs in that they are held within a Canadian mutual fund corporation, which means investors would likely not be subject to superficial tax losses if they sell an index ETF and purchase one of the corporate class ETFs with the same index exposure.

The TRI Advantage

The majority of Horizons TRI ETFs utilize a synthetic structure, known as a total return swap.

Unlike a traditional physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the Horizons TRI ETFs receive the total return of the applicable index by entering into total return swap agreements with one or more counterparties, typically large Canadian financial institutions, which provide the ETFs with the total return of the relevant index.

The Horizons TRI ETFs that utilize total return swaps achieve tax efficiency primarily by receiving the total return of the index (before fees). The value of the index constituent distributions get reflected in the ETF’s share price and are not distributed to unitholders.

This means that an investor is generally only expected to be taxed on any capital appreciation of the ETF if, and when, the shares of their ETF are sold.

To gain exposure to certain indices through a total return swap, counterparties may charge the Horizons TRI ETF a swap fee (depending on the underlying asset). The Horizons TRI ETFs that provide exposure to foreign equities and fixed income securities will typically be charged a swap fee. None of the Horizons TRI ETFs that provide exposure to Canadian equities and preferred shares currently have a swap fee associated with their total return swap.

There are some exceptions within this ETF lineup, most notably the Horizons NASDAQ-100 ETF (“HXQ”) and the Horizons US Large Cap Index ETF (“HULC”). These two ETFs are held within the corporate structure but physically hold the underlying securities of the indices they seek to replicate instead of using a total return swap.

ETF Tax-Loss Harvesting Opportunities

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Source: Bloomberg, as at March 31, 2020.
The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the tables above are not intended to reflect future values of, or future returns on, the Horizons Exchange Traded Products or on any investment in any of the ETFs shown.
*Investment fund regulations restrict the presentation of performance figures until a fund reaches its one-year anniversary
**Effective January 4th, 2020, HXQ changed its portfolio from a total-return swap to physical replication of the underlying index. This reduced the expenses applicable to the ETF by the 0.30% swap fee, and is expected to increase the trading costs. Overall, the expenses are expected to decline resulting in less tracking error going forward.

General Investment Objectives:
HXT: Seeks to replicate, to the extent possible, the performance of the S&P/TSX 60™ Index (Total Return), net of expenses.
HXCN: Seeks to replicate, to the extent possible, the performance of the S&P/TSX Capped Composite Index (Total Return), net of expenses.
HXH: Seeks to replicate, to the extent possible, the performance of the Solactive Canadian High Dividend Yield Index (Total Return), net of expenses.
HXS: Seeks to replicate, to the extent possible, the performance of the S&P 500® Index (Total Return), net of expenses.
HXE: Seeks to replicate, to the extent possible, the performance of the S&P/TSX Capped Energy Index (Total Return), net of fees and expenses.
HXF: Seeks to replicate, to the extent possible, the performance of the S&P/TSX Capped Financials Index (Total Return), net of fees and expenses.
HSH: Seeks to replicate, to the extent possible, the performance of the S&P 500® CAD Hedged Index (Total Return), net of expenses.
HULC: Seeks to replicate, to the extent possible, the performance of the Solactive US Large Cap Index (CA NTR), net of expenses.
HXQ: Seeks to replicate, to the extent possible, the performance of the NASDAQ 100® Index (Total Return), net of fees and expenses.
HXDM: Seeks to replicate, to the extent possible, the performance of the NASDAQ 100® Index (Total Return) – “the Index” – net of expenses.
HBB: Seeks to replicate, to the extent possible, the performance of the Solactive Canadian Select Universe Bond Index (Total Return), net of expenses.
HTH: Seeks to replicate, to the extent possible, the performance of the Solactive US 7-10 Year Treasury Bond CAD Hedged Index (Total Return), net of expenses.
HTB: Seeks to replicate, to the extent possible, the performance of the Solactive US 7-10 Year Treasury Bond Index (Total Return), net of expenses.
HCRE: Seeks to replicate, to the extent possible, the performance of the Solactive Equal Weight Canada REIT Index (Total Return), net of expenses.
HEWB: Seeks to replicate, to the extent possible, the performance of the Solactive Equal Weight Canada Banks Index (Total Return) (the “Index”), net of expenses.
HLPR: Seeks to replicate, to the extent possible, the performance of the Solactive Laddered Canadian Preferred Share Index (Total Return), net of expenses.
XIU: Seeks long-term capital growth by replicating the performance of the S&P/TSX 60 Index, net of expenses.
VCE: Seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad Canadian equity index that measures the investment return of publicly traded securities in the Canadian market
EWC: Seeks to track the investment results of an index composed of Canadian equities.
ZCN: Seeks to replicate, to the extent possible, the performance of the S&P/TSX Capped Composite Index (Index), net of expenses.
VCN: Seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad Canadian equity index that measures the investment return of large-, mid- and small-capitalization, publicly traded securities in the Canadian market.
XDV: Seeks to provide long-term capital growth by replicating the performance of the Dow Jones Canada Select Dividend Index, net of expenses.
CDZ: Seeks to replicate the S&P/TSX Canadian Dividend Aristocrats Index, less fees and expenses.
ZDV: Seeks to provide exposure to a yield weighted portfolio of Canadian dividend paying stocks.
VDY: Seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad Canadian equity index that measures the investment return of common stocks of Canadian companies that are characterized by high dividend yield.
XEG: Seeks long-term capital growth by replicating the performance of the S&P/TSX Capped Energy Index, net of expenses.
XFN: Seeks long-term capital growth by replicating the performance of the S&P/TSX Capped Financials Index, net of expenses.
XUS: Seeks long-term capital growth by replicating the performance of the S&P 500 Index, net of expenses. This exposure is also available hedged to the Canadian dollar in XSP.
ZSP: Designed to replicate, to the extent possible, the performance of the S&P 500 Index, net of expenses. The ETF invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index.
VFV: Seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad U.S. equity index that measures the investment return of large-capitalization U.S. stocks. Currently, this Vanguard ETF seeks to track the S&P 500 Index (or any successor thereto). It invests directly or indirectly primarily in stocks of U.S. companies.
SPY: Seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the “Index”).
IVV: Seeks long-term capital growth by replicating the performance of the S&P 500 Index, net of expenses.
XSP: Seeks long-term capital growth by replicating the performance of the S&P 500 Hedged to Canadian Dollars Index, net of expenses.
ZUE: Seeks to replicate, to the extent possible, the performance of the S&P 500 Hedged to Canadian Dollars Index (Index), net of expenses.
VSP: Seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad U.S. equity index that measures the investment return of large-capitalization U.S. stocks, which Index is hedged to the Canadian dollar.
QUU: Seeks to replicate, to the extent reasonably possible and before fees and expenses, the performance of the Solactive US Large Cap Index, or any successor thereto. It invests primarily in U.S. equity securities.
TPU: Seeks to track, to the extent reasonably possible and before the deduction of fees and expenses, the performance of a broad U.S. equity market index that measures the investment return of large-capitalization U.S. stocks.
XQQ: Seeks to provide long-term capital growth by replicating the performance of the NASDAQ-100 Currency Hedged CAD Index, net of expenses.
ZQQ: Seeks to replicate, to the extent possible, the performance of a NASDAQ listed companies index, net of expenses.
QQQ: Is a unit investment trust designed to seek to track the investment results, before fees and expenses, of the NASDAQ-100Index® XEF: Seeks long-term capital growth by replicating the performance of the MSCI EAFE® Investable Market Index, net of expenses
ZEA: Seeks to replicate, to the extent possible, the performance of the MSCI EAFE Index, net of expense.
EFA: Seeks to track the investment results of an index composed of large- and mid-capitalization developed market equities, excluding the U.S. and Canada.
XBB: Seeks to provide income by replicating the performance of the FTSE Canada Universe Bond Index™, net of expenses.
ZAG: Seeks to replicate, to the extent possible, the performance of the FTSE Canada UniverseXM Bond Index™, net of expenses.
VAB: Seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad Canadian bond index.
QBB: Seeks to replicate, to the extent reasonably possible and before fees and expenses, the performance of the Solactive Canadian Select Universe Bond Index, or any successor thereto. It invests primarily Canadian investment grade bonds, including government, quasi-government and corporate bonds.
IEF: Seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities between seven and ten years.
ZRE: Seeks to replicate, to the extent possible, the performance of the Solactive Equal Weight Canada REIT Index, net of expenses.
XRE: Seeks to provide long-term capital growth by replicating the performance of the S&P/TSX Capped REIT Index, net of expenses.
REIT: Seeks to replicate, to the extent reasonably possible and before fees and expenses, the performance of the S&P/TSX Capped REIT Income Index, or any successor thereto. This ETF invests, directly or indirectly, primarily in real estate investment trusts (REITs) listed on a Canadian exchange.
VRE: Seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad Canadian real estate equity index that measures the investment return of publicly traded securities in the Canadian real estate sector.
ZEB: Seeks to replicate, to the extent possible, the performance of the Solactive Equal Weight Canada Banks Index, net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index.
ZWB: Seeks to provide exposure to a portfolio of Canadian banks while earning call option premiums. The Fund invests in securities of Canadian banks, and dynamically writes covered call options. The call options are written out of the money and selected based on analyzing the option’s implied volatility. The option premium provides limited downside protection. The underlying portfolio is rebalanced and reconstituted semi-annually in June and December, and options are rolled forward upon expiry. In addition, as ZWB is a fund of fund, the management fees charged are reduced by those accrued in the underlying funds.
XFN: Seeks long-term capital growth by replicating the performance of the S&P/TSX Capped Financials Index, net of expenses.
ZPR: Seeks to replicate, to the extent possible, the performance of the Solactive Laddered Canadian Preferred Share Index, net of expenses

Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the “Horizons Exchange Traded Products”). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing.

Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF does not track an index but rather a compounding rate of interest paid on a cash deposit that can change over time.

Certain statements may constitute a forward looking statement, including those identified by the expressions “anticipate”, “estimate” or “expect” and similar expressions (including grammatical variations thereof) to the extent they relate to the ETFs or Horizons ETFs. The forward-looking statements are not historical facts but reflect the ETFs, the ETF’s managers or Horizons ETFs current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on the ETFs’ forward looking statements. These forward-looking statements are made as of the date hereof and the ETFs do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

The tax views expressed herein are of a general nature and should not be considered as advice to purchase or to sell any of the securities mentioned. Before making any investment decision, please consult your investment advisor or advisors. We are not an investment or tax advisor and are not qualified to offer investment or tax advice. Investors should consult their investment and tax professional for advice and should read the prospectus of the relevant fund/security mentioned before they buy or sell any fund/security mentioned.

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Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. The BetaPro Products consist of our 2x Daily Bull and 2x Daily Bear ETFs (“2x Daily ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the 2x Daily ETFs and the Inverse ETFs are the BetaPro Marijuana Companies 2x Daily Bull ETF (“HMJU”) and BetaPro Marijuana Companies Inverse ETF (“HMJI”), which track the North American MOC Marijuana Index (NTR) and North American MOC Marijuana Index (TR), respectively. The 2x Daily ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or –200% of the performance of a specified underlying index, commodity futures index or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a 2x Daily ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the 2x Daily ETFs, possibly direction from the performance of their respective Target(s) for the same period. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF. Due to the high cost of borrowing the securities of marijuana companies in particular, the hedging costs charged to HMJI are expected to be material and are expected to materially reduce the returns of HMJI to unitholders and materially impair the ability of HMJI to meet its investment objectives. Currently, the manager expects the hedging costs to be charged to HMJI and borne by unitholders will be between 10.00% and 45.00% per annum of the aggregate notional exposure of HMJI’s forward documents. The hedging costs may increase above this range. The manager will publish, on its website, the updated monthly fixed hedging cost for HMJI for the upcoming month as negotiated with the counterparty to the forward documents, based on the then current market conditions. The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.