ETF Insights Report – Global X S&P 500 Total Return ETF – TSE:HXS

Global X S&P 500 Total Return ETF – HXS.TO

HXS seeks to replicate, to the extent possible, the performance of the S&P 500® Index (Total Return), net of expenses. The S&P 500® Index (Total Return) is designed to measure the performance of the large-cap market segment of the U.S. equity market. The fund will use total return swap contracts to provide the total returns of the S&P 500 without paying out distributions, making it a tax-friendly option for taxable accounts.

Focus area	Score	★★★★★
Performance (CAGR)	18.9%	★★★★★
Fees (MER)	0.11%	★★★★
Volatility (Beta)	0.74	★★★★
Distribution (Yield)	0%	★
Valuation (Forward P/E)	22.24	★★★
5-year earnings growth	7.94%	★★★★

Pros

Single-click exposure to the S&P 500
The fund utilizes a total return structure, which we’ll explain further below. This allows investors to defer taxes until the fund is sold and triggers capital gains, not dividend/interest income
Despite its unique structure, it offers some of the lowest fees out of any S&P 500 ETF in Canada

Cons

The S&P 500 is currently heavily concentrated in some major technology companies. Its past performance certainly doesn’t guarantee future performance, and many people get caught up in recency bias when it comes to strong performing options
The fund is unhedged, meaning you’ll be exposed to not only the S&P 500 but the currency fluctuations in regard to the CAD and USD

I am a huge advocate for a total return investing strategy. There are a few cases where an income-focused strategy can be more optimal for investors, particularly those close to or in retirement, but for the most part, investors are going to be better off striving to get the highest overall returns from their portfolio relative to their risk tolerance.

Global X (formerly Horizons) has introduced what they call “total return” funds, with the goal of driving the highest possible return in price on their ETF units without issuing any taxable distributions. I have noticed that many investors buy this fund while having relatively little knowledge of how they work. So, I’ll use this section to fill you in.

HXS is an S&P 500 ETF that doesn’t really own the S&P 500. Instead, it partners with someone, let’s say, a major institution, in what they call a “total return swap contract.”

The major institution will hold the underlying assets, in this case, the S&P 500. It will pay Global X the pricing returns plus the dividends received. In return, Global X pays the institution a financing fee.

Because Global X is paid the distributions and returns of the index, they are bundled together as one payment and increase the net asset value of the fund, whereas a normal S&P 500 ETF like VFV or VOO will instead accumulate the returns of the S&P 500 and then pay out distributions to its unitholders. This creates a taxable event, along with more overall transactions needed to be made by the fund, which increases fees.

Sector Risk	High
Concentration Risk	Low
Geographical Risk	High
Liquidity Risk	Low

Because this fund works with a third party to provide its returns, it has additional risks over a standard S&P 500 ETF like VFV or VOO. The main risk is counterparty risk. In the simplest explanation possible, counterparty risk is the risk that one of the parties may not be able to fulfill their obligations of the contract.

A real-life scenario: You lend money to a friend with the agreement that they will pay you back next month. Counterparty risk is the chance that your friend might not pay you back as promised. With a normal S&P 500 fund, because the fund simply owns the underlying holdings and benefits from the returns of those holdings, this doesn’t exist. Keep in mind, however, that this risk is relatively small. These are huge financial institutions. For example, Deutsche Bank is one of them, a bank with over $900B CAD in assets under management. However, the risk is still present over and above a standard S&P 500 ETF, so it should be noted.

Outside of that counterparty risk, the risks of this fund are relatively in line with any other S&P 500 risk. The high concentration risk in the major technology companies in the United States could end up in the index underperforming the global markets if tech were to witness a drawdown. This is arguably some of the largest technology concentration in the S&P 500 in history, and many investors get caught up in recency bias.

What I mean by this is they look at the historical returns of the S&P 500 over the last decade and assume it will continue to provide those returns moving forward. This simply isn’t the case.

Top 10 Holdings	Allocation
Apple (AAPL)	7%
Microsoft (MSFT)	5.87%
NVIDIA (NVDA)	5.58%
Amazon (AMZN)	3.37%
Meta Platforms (META)	2.65%
Berkshire Hathaway (BRK)	2.05%
Alphabet (GOOG)	1.9%
Broadcom (AVGO)	1.65%
Alphabet (GOOGL)	1.55%
Tesla (TSLA)	1.5%

I would like to clarify one thing before I start. Technically, Global X does not own any of the top holdings above. Instead, it owns a swap contract with an institution that owns these holdings. However, I felt it would be better to list the underlying stocks that Global X has through the exposure of that swap contract to give investors a better idea of what they can be exposed to.

As mentioned, the S&P 500 has extensive technology exposure at the top end of its portfolio. As we can see above, the only two stocks that aren’t involved in the tech sector are Teslaa and Berkshire Hathaway. Outside of that, the 8 tech companies inside of the top 10 make up over 30% of the S&P 500.

I, for one, am comfortable with this type of exposure. Technology is expanding at a rapid pace, and an S&P 500 index fund gives you solid exposure to some of the largest names in the space. I also acknowledge the risk from the heavy concentration in tech right now. If they experience a drawdown or a lull in the expansion of artificial intelligence and adoption of tech overall, the S&P 500 will struggle.

Valuations are high, which means these tech stocks must perform to maintain elevated valuations. If they falter, we could see what we call a “multiple contraction,” meaning the market will adjust the price-to-earnings ratios it is willing to pay for these options. Ultimately this could lead to the S&P 500 lagging other major indexes.

	HXS	VFV	ZSP
Returns		✅
Diversification	✅	✅	✅
Fees	✅
Tax efficiency	✅
Distribution			✅

The returns of Global X’s total return fund versus something like Vanguard’s (VFV) and BMO’s (ZSP) S&P 500 ETFs are relatively equal. If you look to the chart above, you’ll notice that ZSP has lagged the other two in terms of total returns since 2013. This is primarily due to fees, which the fund has reduced. If we shorten the return data to 5 years or 3 years, now that ZSP charges 0.09%, returns are effectively equal.

The key focus here, and what will be attractive for many investors, is the tax efficiency of something like HXS. All else being equal, which it is, the tax-efficient nature of HXS is why I’d view it as the best S&P 500 ETF to own in Canada.

Yes, its fees are around 2 basis points (0.02%) higher annually. Still, the ability to not receive taxable distributions on an annual basis plus turn that taxable distribution income into a capital gain, often the more tax-friendly form of income, is a huge benefit.

Overall, it is unlikely to lead to material differences in terms of returns and money in your pocket, but if we can put any amount extra in our wallets instead of the government’s or the fund manager’s pockets, we should. A $10,000 position in VFV would result in around $116 a year in taxable distributions, and you could realistically lose 30-40% of that to taxes. With HXS, that $116 would accumulate in your unit value, which you’d eventually sell for a capital gain, and only half would be taxable.

Unless you are worried about the potential counterparty risks that I mentioned earlier in the report, or for some reason you’d rather have the distribution paid to you, I don’t see any reason for investors not to utilize a total return S&P 500 ETF over a standard one.

This area will be relatively short. As explained throughout this report, HXS doesn’t pay a distribution. Instead, it receives the distributions from the underlying holdings of the S&P 500 via a swap contract with a major institution. It is reflected in the net asset value of the fund, increasing its unit value by the distribution paid.

This allows investors to avoid taxable events. Instead, they would sell the fund at a later date and trigger a capital gain, not dividend or interest income.

The S&P 500 is one of the most recognized indexes on the planet. It contains some of the largest, fastest-growing companies in the world. It offers investors exposure to one of the fastest-growing economies in the world. Whether you choose to own the S&P 500 through an outright index fund or possibly through a U.S. Total Market fund, having exposure is, in my opinion, key to a well-diversified portfolio.

Tax mitigation is also a key element to a rock-solid portfolio, as the less money we give to the government, the more money ends up in our pockets. HXS’s total return nature allows investors to defer taxes and change the structure of those taxes (from dividend or interest income to capital gain), which ultimately will put more money in their pockets at the end of the day.

The S&P 500 has never really been an income-generating asset, particularly with the amount of high-growth and low (or no) yielding technology companies making up such a large portion of it. So, it is unlikely to be purchased as an income-producing asset, and the small distribution it does pay can be optimally deferred until an investor wants to sell units.

The only reason I can think of that one would not want to own this fund over a standard S&P 500 index fund like VFV or ZSP is that they potentially don’t like the counterparty risk in the event the institution was unable to pay Global X its returns.

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