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Horizons ETFs launches corporate class Emerging Markets ETF


Horizons ETFs Management has launched a new Total Return Index ETF (TRI ETF), the Horizons Emerging Markets Equity Index ETF (HXEM), on the Toronto Stock Exchange under the ticker HXEM.HXEM seeks to replicate, to the extent possible, the performance of the Horizons Emerging Markets Futures Roll Index (Total Return), net of expenses. The Index is designed to measure the performance of large- and mid-cap securities across 26 emerging markets (EM) countries. The Index reflects the returns generated over time through long notional investments in a series of MSCI Emerging Markets Index Futures that are, in turn, based on the performance of the MSCI Emerging Markets Index.

The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 EM countries. Currently with 1,404 constituents, this MSCI Index covers approxi­mately 85% of the free float-adjusted market capitalisation in each country. For investors globally, this is considered to be the most widely followed benchmark for EM equities in the world. The use of futures contracts improves the daily liquidity of index replication while the constituents of the Index are not traded.

“In emerging markets across the world, the effects of rapid economic development and globalisation have resulted in a number of companies in developing regions becoming globally significant companies, such as Tencent Holdings, Taiwan Semi-Conductor and Samsung Electronics, to name a few,” says Steve Hawkins, President and CEO of Horizons ETFs. “In our view, investors that ignore developing markets, ignore key companies that are likely going to play a more significant role in the global economy.”

HXEM is a class of shares in a corporate class structure that allows the ETF to deliver its returns in a tax-efficient manner. Investors are only expected to receive the total return of the Index, which is reflected in the ETF share’s net asset value (“NAV”). Investors are not expected to receive any taxable distributions from HXEM. Dividends paid by foreign companies are not eligible for the Canadian dividend tax credit and are taxed in the hands of taxable Canadian resident investors as regular income at the marginal tax rate of the investor. This structure makes the ETF particularly advantageous if it’s held in a taxable account, where tax on foreign dividend distributions could potentially be in excess of 50 per cent, HXEM would also not be subject directly to foreign withholding tax since it does not actually receive physical dividends. These attributes are key differentiating features of HXEM versus other EM ETFs. 

“Our family of TRI ETFs has been the fastest growing product suite in our business with some of the best-selling ETFs in Canada in 2020. One area where we had an index coverage gap, was emerging market equity,” says Hawkins. “Many of the constituents in the MSCI Emerging Markets Index pay dividends, which are taxed at the marginal tax rate of taxable Canadian resident investors and subject to foreign withholding tax. The tax-efficiency of our corporate class structure offers investors an opportunity to participate in the rise of emerging markets without being subject to taxes on dividends and foreign withholding tax, which can erode total return and require investors to navigate and assess complex tax scenarios.”

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