Corporate class funds defer the hit by the tax man, though ETFs and ordinary shares may offer better returns.
It's been a while since I dipped into the Q&A inbox so let's remedy that now. Here are some of the questions that have come in over the past month.
Floating rate ETF
Q – I would like to know your thoughts on the iShares Floating Rate Index ETF (XFR). Is it a good pick for the bond portion of my RRSP? It was mentioned by Pat Bolland in the April issue of MoneySense Magazine. – John K.
A – This ETF invests in a portfolio of floating rate bonds and is designed to replicate the performance of the FTSE TMX Canada FRN Index, net of expenses (the MER is 0.2 per cent). That target index is a change from previously when the fund had been based on the DEX FRN Index, however the underlying investment principle remains the same.
The advantage of floating rate bonds is that they are not as susceptible to the negative impact of rising interest rates. That's because their payment increases according to a formula, which may be tied to the prime rate, the Bank of Canada rate, the Government of Canada 10-year bond rate, etc. Each bond will have different characteristics.
Virtually the entire portfolio is invested in short-term bonds with maturities of five years or less. The current average maturity is 2.56 years. As you might expect with this type of portfolio, the yield is very low – the distribution yield is 1.25 per cent and the weighted average yield to maturity is 1.21 per cent. The monthly payments are about $0.02 per unit.
The trade-off for that low return is very low risk. The combination of the floating rates and the short term of the securities make this a very stable ETF to hold. Over the past 12 months, it has traded in a very narrow range of between $20.10 and $20.20 a unit. As I write it is at about the mid-point of that range.
If you are looking for a very low-risk bond fund for your RRSP, this would certainly fit. But it's not going to do much to boost your returns. The year-to-date profit as of the close of trading on April 25 was only 0.58 per cent. By way of comparison, the iShares 1-5 Years Laddered Corporate Bond Index Fund (CBO) was up 1.58 per cent in the same period. The iShares DEX Short Term Bond Index Fund (XSB), which is recommended in our Income Investor newsletter, is ahead 1.66 per cent year-to-date.
Problem with withholding tax
Q – In May of 2013, I bought some shares of Honda in my RRSP believing that the tax treaty would take care of the 15 per cent withholding tax. Well, I just got a statement from RBC Direct Investing that had withholding tax on the dividends I received. I called them and they said the treaty doesn't cover "Limited Partnerships". Is this true? I though that the treaty covered U.S. dividends. I was just wondering what I am missing here. – Calvin B.
A – Unfortunately, Honda is not a U.S. company, which is why its dividends are subject to withholding tax. Although it trades on New York, it does so as an American Depository Receipt (ADR) and these do not come under the Canada-U.S. Tax Treaty. (It is not a limited partnership as your broker suggested, but they are not covered either).
To be clear, only dividends from U.S. companies are exempt from withholding tax and then only if the shares are held in an RRSP or a RRIF. U.S. dividends paid to TFSAs and RESPs will be taxed.
Same fund, why the difference?
Q – I am looking at Fidelity Canadian Large Cap Fund Series A and Series F. I see one is a no-load and one is a backend load and they have different MERs.
Can you tell me what the difference is between the different Series (i.e. why would anyone buy Series A when Series F is a better performer, better MER, better return and has the identical holdings?)
Also, I hold Fidelity Canadian Growth Company Fund but my financial statement doesn't identify which Series I hold. How do I tell? (This applies to many of my holdings). – Dale F.
A – Series F units are available only for fee-based accounts. This applies to the F units of all companies, not just Fidelity. The rationale is that if you pay your adviser a percentage of the asset value of your portfolio each year as compensation, you should be entitled to a break on the cost of the mutual funds you own.
I'm surprised your statement does not indicate which units of Fidelity Canadian Growth Company that you own. You will have to ask your adviser that question. If you don't have a fee-based account, my advice is to try to buy the front-end load B units at zero commission. The code is FID265.
U.S. withholding tax on preferreds
Q – Could you please tell me if there is any withholding tax on U.S. preferred shares held in an RRSP. – David B.
A – No. U.S. source dividends are not subject to withholding tax if they are paid into an RRSP. But the 15 per cent withholding tax does apply in a TFSA.
Sell or buy?
Q – In the last few issues of your newsletter you have been giving advice to sell and take money off the table but the same issues have buy recommendations. What gives? – Barry D.
A – We never suggested that you sell everything. We expect to see a market correction, not a crash. Before the correction happens, if you have good profits on some of our recommendations, raising cash at a time when the market is high is not a bad idea. As far as the Buys are concerned, you'll note that we have frequently commented that a stock is at the upper end of its trading range and suggested that conservative investors might want to wait for a pull back.
Old stock certificates
Q – I have a number of old share certificates from my grandfather (Alert Oils, 175 shares, issued 1926; British American MFG & Power Co, 5 shares, issued 1913; Brooks Steam Motors Ltd., 10 shares, issued 1926; Bank of BC 4 shares, issued 1982). Can you advise me on the process for determining the value, if any, of these shares and how to redeem them? – Ross N.
A – I suggest you do a Google search for Old Stock Certificates. Here's an article from the Wall Street Journal that may help.
You can also try searching the names of the companies on the certificates.
If you have a full-service broker, you can ask him/her for assistance. The company's research department may be able to find some answers.
If any readers are familiar with any of these companies and can offer some advice, please email me.
I welcome your financial/investing questions at any time. Send them to me at gpape@rogers.com. Write "Globe question" in the subject line. I can't promise personal answers but I'll respond to those of broadest interest in this column.