Toronto-based Horizons ETFs Management (Canada) Inc. has launched Horizons Cdn Select Universe Bond ETF, which provides investors with low-cost and tax-efficient exposure to the Canadian investment grade bond universe.

The new exchange traded fund (ETF) began trading Thursday on the Toronto Stock Exchange (TSX:HBB), with a management fee of 0.15%.

The fund seeks to replicate the performance of the Solactive Canadian Select Universe Bond Index, net of expenses. The index is calculated by Germany-based index provider Solactive, which has approximately US$20 billion invested in products linked to its indices with 125 ETFs benchmarked to them.

Recognizing that sampling is a reality of bond indexing, the index seeks to reduce replication costs by having fewer constituents than 1,300 bonds in the Canadian investment grade bond universe, many of which do not have sufficient liquidity to be used efficiently by an ETF in replication. Currently, the index only holds 180 liquid bonds and offers similar duration, yield and return characteristics to the broader Canadian investment grade bond universe.

The fund will also be the first fixed income ETF in Canada to use the total return swap (TRS) structure employed by Horizons’ TRS equity ETFs. This structure can reduce the risk of tracking error for ETFs that arises when seeking to replicate their referenced indices while also providing tax efficiency for unitholders.

“The Canadian index ETF market may be viewed as saturated, but that doesn’t mean there isn’t room for further product innovation,” said Howard Atkinson, president of Horizons ETFs, in a release. “HBB is an example of how indexing in the fixed income space can be made better by both improving the underlying index and utilizing a TRS structure to reduce the potential for tracking error and improve tax efficiency.”

Similar to the other total return swap ETFs that Horizons offers, the fund will track a total return version of the index, which means that the net-asset-value of the ETF will immediately reflect the value of any distributions made by the underlying securities of the index. As such, the fund is not expected to make any distributions, which makes it a compelling fixed income alternative for non-registered accounts where distributions are taxed.

“Over the last three and half years of running TRS-based ETFs, they have not had a single taxable distribution and we expect the same for HBB,” Atkinson said. “Fixed income investors may find the idea of a bond ETF that doesn’t pay distributions a little different, but we believe by eliminating regular taxable distributions HBB is strategically positioned to deliver better after-tax total-return performance than all the other Canadian bond universe index ETFs.”