One of the advantages of exchange-traded funds (ETFs) is that they make it easier to harvest tax losses in taxable accounts. For example, if you have a loss showing in the iShares CDN Large Cap 60 Index Fund (XIU) you can simultaneously sell it and buy the iShares CDN Composite Index Fund (XIC) as a replacement.
It maintains a similar exposure to the Canadian stock market yet is different enough (as I understand) from XIU to avoid triggering the superficial loss rule (which requires waiting 30 days before repurchasing).
Another example was suggested by a financial advisor, Jean Baker, in a Jonathan Chevreau column awhile back. She suggested Canadian investors holding broadly based U.S.-dollar denominated ETFs on U.S. exchanges take advantage of currency losses (as arise when the C$ shoots up against the U.S. dollar, like over past year) by selling the ETF and replacing it with a similar broad-based ETF. An example would be to sell the iShares S&P500 (IVV) ETF and buy the S&P Depositary Receipts (SPY) ETF.
In another article, financial advisor, Laurent Wermenlinger, called the ability to take tax losses by switching among ETFs “hidden alpha.” In other words, with tax harvesting, ETFs may actually be able to surpass market averages (never mind just matching them and beating most advisers).
It seems to be an intriguing concept. I wonder how it would compare against a buy-and-hold strategy within an RRSP. It might be interesting to crunch the numbers. Anyways, the basic of idea of using ETFs to harvest tax losses does seem to provide another reason for using ETFs over mutual funds.
