BetaPro Management Inc. has launched a new Canadian equity exchange traded fund that boasts the lowest management fee of any ETF in Canada, the company announced on Tuesday.

The Horizons BetaPro S&P/TSX 60 Index ETF began trading on the Toronto Stock Exchange on Wednesday, under the symbol HXT. It seeks to replicate, to the extent possible, the performance of the S&P/TSX 60 Index, net of expenses.

“In our opinion, the S&P/TSX 60 Index is the single most important Canadian equity benchmark,” said Howard Atkinson, president of BetaPro. “HXT represents another milestone for ETF investors and ushers in a new era of competition for the Canadian ETF industry, which we believe will lead to lower costs and greater selection for investors.”

The ETF has a management fee of seven basis points – less than half the cost of the next lowest priced ETF in Canada.

“Fees are a crucial component for all investors, including those choosing index-based ETF investing. By design, index-tracking ETFs are not supposed to outperform the index, so if you lower their cost, you increase their potential performance,” Atkinson said.

The new fund will compete with the iShares S&P/TSX 60 Index Fund, offered by BlackRock Asset Management Canada Ltd., which tracks the same index.

HXT uses a total return swap, a popular institutional investment instrument which ensures the precise delivery of index returns, to the extent possible. Under this structure, rather than holding the constituent securities of the index, as many ETFs do, HXT will have 100% of its assets in cash as collateral for the total return swap, which will change in value to reflect 100% of the positive or negative return of the S&P/TSX 60 Index. It is the obligation of the swap provider to deliver the exact return of the index.

The use of this type of swap eliminates trading expenses and rebalancing costs, which can make it difficult for an ETF to precisely replicate the performance of the index and can result in a potential tracking error to the index return, according to BetaPro.

The total return swap structure can also provide investors with greater tax efficiency compared to holding physical securities in non-registered accounts. Instead of paying taxable distributions, the value of any distributions paid out by the index’s constituent issuers will be reflected in the total return of the index, and therefore reflected in the net asset value of HXT.

“We do not anticipate that HXT will make any taxable distributions,” said Atkinson. “This is consistent with the tradition of our other BetaPro ETFs, which have never paid out any quarterly or year-end taxable distributions.”

IE