Non-North American developed market ETFs tend to pay high dividends that are taxed each year as regular income. Global X (formerly Horizons) HXDM has a swap-based corporate class ETF structure that functionally avoids taxable foreign dividend income. Instead, the ETF accrues that amount as a capital gain, which is taxed at half the rate. Plus, the tax bill is deferred until the HXDM is sold – potentially many years later. Conventional ETFs like XEF, VIU, or ZEA cover similar markets for a lower cost but with more annual taxable income.
For those considering an ETF to diversify their portfolio outside of North America, how does HXDM stack up against its conventional competition? There is a better potential advantage for this ETF than most of the other corporate-class ETFs. However, it is still not a slam dunk. Learn why and use that to weigh the potential risks and benefits.
Corp Class ETF Basics
Mutual Fund Corporation vs Trust Investment Income
A corporate-class ETF has a structure different from that of conventional ETFs. The corp class ETF is one share class in a mutual fund corporation. So, the income from that ETF can be offset by expenses in other ETFs in the corporate family. If the net income across the MF corporate family of funds is zero, there is no tax. Instead, the value of each ETF unit value rises by the amount of its net income. So, for the HXDM ETF, dividend income effectively becomes a capital gain rather than a taxable dividend. Capital gains are generally taxed at half the usual income tax rate and only when the ETF units are sold.
In contrast, conventional ETFs, like XEF/VIU/ZEA, are a trust structure. So, the income received must be paid out and taxed in the hands of the unit holders each year. That income is taxed at the usual personal marginal rates. Money lost to tax each year is money that is not invested and growing.
Foreign Dividends & Withholding Tax
Foreign dividends are taxed as regular income in Canada. There is also a foreign withholding tax (FWT) on dividends collected in their country of origin. It varies by country, but in the non-North American developed markets, it is about 8% overall. So, for a 3% dividend, there would be 0.24% FWT. Fortunately, most developed market countries have tax treaties with Canada, and you recoup that FWT when you file Canadian income taxes.
With the HXDM ETF, a swap contract is used instead of holding stocks directly and receiving dividends. So, it avoids FWT altogether.
Mutual Fund Corporation Tax Risk
The other feature of an MF corp is that losses from previous years are carried forward and used to offset future income. In the case of Global X, they booked a large loss pool during the 2020 market swoon. Since then, they have had more income than expenses each year, which has caused the loss pool to shrink, but they have still not had net income.

The trouble occurs if there is net income inside the MF corp. If that happens, it is taxed at the business tax rate, which is 39.5% in the case of Global X. That tax paid within the corporation would be assigned to the ETFs that contributed to the net income and reduce their share value. When you sell, the total of that hidden tax plus your personal tax on a capital gain is higher than interest or foreign dividend income.
Will the lights go out on HXDM?
So far, there seems to be a significant loss pool before the shadow of corporate tax is cast on these ETFs. However, you can only see the loss pool update for a year when Global X issues its year-end report for the ETFs each spring.

That said, Global X has made some changes this year that may help keep the lights on longer. Global X changed up its all-in-one ETFs (HEQT and friends) to use more conventional ETFs instead of the corporate-class ones. That may decrease income growth (but also decrease ETF return). They have also increased their swap fees as of Jan 1st, 2025, which increases expenses.
I suspect that Global X would initiate a transition into a conventional structure if they saw trouble coming. However, there is always a risk of error. There would also be the management question of how to handle all of the unsettled swap income.
International Developed Market ETFs
While North American markets dominate the world currently and are likely to dominate Canadian investor portfolios, investing outside of North America adds diversification. ETFs are a simple way to gain exposure to developed country stock markets outside of North America. That could be as ETFs embedded within an all-in-one ETF that rebalances to maintain that exposure or as an individual ETF focused on non-NA markets.
Several ETF options from the major providers cover non-North American developed markets specifically. HXDM is a corporate class option, and the major Canadian-listed conventional ETF options are ZEA, VIU, and XEF. For the modeling in this post, I will use XEF. It uses a similar (but not identical) index to HXDM and has the lowest total costs (MER plus trading costs).
Non-NA Developed Market Indexes
Global X’s HXDM ETF uses a swap contract to track its own EAFE Futures Roll Total Return Index. This index, which is comprised of 800 large-cap companies, basically mirrors the MSCI EAFE index. An important nuance is that it tracks the futures roll. So, the dividend is not added in. Instead, the collateral held for the swap earns the overnight US Fed rate. When the Fed rate is lower than the index yield, the ETF lags the conventional index. Conversely, it is a bonus when the Fed rate is higher.
For example, the Fed rate is currently 4.33% – higher than EAFE yield of ~3%. So, HXDM has had a beneficial tracking error recently. It was detrimental when the Fed rate was extremely low. While a source of increased volatility and tracking error – it has averaged out to be close since HXDM’s inception (actual tracking error of -0.34 vs -0.24 expected relative to XEF).* That included a long period of extremely low rates. If we continue with more normalized rates, it should be close. For this analysis, I will ignore this wrinkle since it is so unpredictable. However, the impact could be significant.
BMO ETFs’ ZEA directly holds stocks that track the MSCI EAFE index. So, it is the most tax-efficient directly comparable conventional ETF to HXDM. Blackrock’s XEF also holds stocks directly but tracks the MSCI EAFE IMI index. That index is slightly broader and includes some smaller companies.
Vanguard’s VIU holds stocks directly and tracks the FTSE All-Cap Ex-NA index of almost 4000 companies. The FTSE index treats some countries, like South Korea, differently from the MSCI indices. So, for the modeling in this post, I will focus on XEF and ZEA. However, VIU would be a reasonable alternative.
Comparative Fees & Costs
HXDM has an MER of 0.22%/yr. Trading costs due to the swap contracts are also added onto that. Previously, they were up to 0.3%/yr but were recently raised to 0.5%/yr. For the analysis, I will assume trading costs of 0.5%/yr for a total fee drag of 0.72%/yr.
The other ETFs that cover the comparable indices also have an MER and some trading costs. BMO ETF’s ZEA has an MER of 0.22%/yr and most recently had a Trading Expense Ratio (TER) of 0.06%/yr for a total fee drag of 0.28%/yr. Blackrock iShares’ XEF ETF has an MER of 0.22%/yr and had a TER of 0.01%/yr in its 2023 financial report for a total fee drag of 0.23%/yr. Vanguard’s VIU ETF had an MER of 0.23%/yr, but also had 0.00% trading costs. Making its fee drag equivalent to XEF.
Total Return (Yield & Capital Gain)
Dividend Yield & Taxes
Even though the FWT for XEF, ZEA, or VIU would be recoverable in a personal taxable account, dividend size also matters. The EAFE and FTSE indices track companies that pay big dividends. The yield varies, but an average of ~3.2%/yr over longer periods of time is a reasonable estimate. That is the gross yield before fees and FWT.
Net Distributions or Growth
The gross yield differs from the distributions you see as an investor because distributions are made after fees and costs of the ETF are deducted. The 8% FWT on a 3.2% dividend yield is 0.26%. For example, XEF has MER & TER of 0.23%/yr. So, the net dividend received is 2.71%. With the FWT credit at tax time, then it is effectively still 2.97%. That 2.97% is taxed at Canadian income tax rates.
For HXDM, the dividend yield would be captured as an increase in the ETF’s share price. The 3.2%/yr would be blunted by the 0.22%/yr MER plus an up to 0.50%/yr swap fee, which would add 2.48%/yr to the share price.
Future returns are unpredictable, but I have arbitrarily set the capital gains at 4.85%/yr for modeling. So, for XEF, that would be a 4.85% capital gain plus a 2.97%/yr dividend for a total return of 7.82%/yr. For HXDM, it would be a total return of 7.33%/yr, all as a capital gain.
Tax Efficiency of HXDM vs XEF
Passing Through All Gains Annually
Generally, a capital gain is attractive because it is taxed at half the usual rate compared to a foreign dividend. That is the simplified appeal of corporate-class ETFs.
If the ETFs were sold every year and tax paid on all dividends and capital gains, that lower capital gains rate would result in less tax for HXDM vs. XEF. However, at the lowest personal tax rates, the higher cost of HXDM overpowers that benefit. At higher marginal tax rates, the tax owed on those fat dividends is worse than the additional 0.5%/yr swap fee. This is shown using Ontario tax rates below.

Tax Deferred Growth
A lower taxable income is only part of the advantage of capital gains. Since that tax is not due until the ETF is sold and the capital gain is realized, there can be tax deferral, too. Tax deferral is generally advantageous because the money that would have been paid as tax stays invested and compounds. This is why it doesn’t make sense to sell the ETFs and realize gains before you have to.
The growth boost from not having a taxable dividend (but a larger unrealized capital gain instead) is shown below. This uses Ontario tax rates, but it would be similar for other provinces. Using corporate-class ETFs in Alberta, Saskatchewan, and Manitoba would have slightly less tax deferral advantage since their income tax rates are lower. HXDM has a definite tax deferral advantage. It grows at higher income levels to a substantial 1.1%/yr advantage at the highest Ontario personal tax rate.

After-Tax Value In The Future
After-Tax Value When You Do Sell
The taxes on tax-deferred growth eventually come due. When sold, the extra capital gains that accrued (instead of dividends) will be partially taxable. One of the risks with ETFs is that you may be forced to realize the capital gain earlier than you’d planned if the ETF gets liquidated. Usually, that is a low risk if you stick with popular broad ETFs from major providers. Global X is a major provider, and these are broad ETFs. However, it is not inconceivable that there could be a problem with corporate-class income management,
To quantify the advantages and risks, I modeled how much more money you could have after-tax if you sold at different points in the future. The higher your tax bracket now, the more of an advantage HXDM would have. Deferral of the extra capital gains tax further into the future also helps.
HXDM vs Conventional ETFs (eg ZEA/XEF/VIU)
The chart below shows the increased after-tax value due to the HXDM vs XEF ETF over time. The illustration below uses a taxable income of $125K in Ontario, both now and in the future. An income level where HXDM could make sense. Tax on dividends is removed annually for the conventional ETFs. The value at each time point is after the capital gains tax from liquidating the ETF. As you can see, there is a small increase in the amount of after-tax money that grows over time. About 1.8% more after-tax money at 10 years, and over 3% at 15 years. Less if the capital gain is taxed at a higher inclusion rate of 66.67%.

The HXDM advantage is slightly better at higher tax brackets. At the highest Ontario tax bracket, the after-tax is 2.8% at 10 years and 4.7% at 15 years (data not shown).
Impact of Different Future vs Current Income Tax Rate
The benefit of tax deferral is also impacted by the current vs. future tax rate. If you defer from a high current to a lower future tax rate, the benefit grows. The reverse also applies. For example, deferring from a low tax bracket now and realizing a large gain that bumps your tax brackets later could be detrimental.
With the high fee drag, HXDM investors could be worse off if they defer taxes from a low current rate and face a much higher future tax rate. In contrast, someone currently in the highest marginal tax bracket who is able to realize the gains at a lower tax rate in the future could have 5.4% more after-tax money at 15 years in this model.

Risk vs Reward: HXDM vs XEF VIU ZEA ETFs
Whether to use HXDM or a conventional ETF is a personal decision. I cannot give specific investing advice. Hopefully, this post will help you to make a more informed one as part of your own due diligence. It is a balance of potential risk and reward. In a tax-sheltered account, like an RRSP or TFSA, it is easy. The cost of a corporate-class ETF is not worth it. In a taxable personal account, it depends.
Potential Reward
The potential reward of using HXDM is small at moderate income levels but could add up over longer time periods. However, a lot can happen over time. The recent increase in the swap fee is a good example. It really cut into the potential tax benefit of this ETF. Further increases are unpredictable and shrink the benefit further or nullify it. If you defer from a lower current tax rate to a higher future one, it could be nasty to realize those gains and make a switch.
The potential advantage is greater in the highest tax brackets, and the risk of being bumped into higher tax rates is also lessened. Taxes can only go so high. Supposedly. They have been higher at different times and in different parts of the world.
Potential Risks
The unknown future is where risk can materialize. We expect that there is investment risk with equities. However, the corporate class structure adds other risks. This analysis assumes that HXDM has no net corporate income assigned to it from the corporate class structure. If there is net income, then it quickly becomes inefficient. Global X might be able to manage a conversion to a conventional ETF if they see that coming, but I am not sure how that would play out.
HXDM has swap-based income. So, the risk of income is greater if they must settle swaps to manage their counterparty risk, which could happen with massive market rises. The counter-party exposure for HXDM is only moderate (28.7%). In this case, the swap is against a futures roll. That introduces another source of tracking error. If the Fed rate is higher than the conventional index dividend yield, it is beneficial and the reverse is also true. That is tough to predict or model, but could have a meaningful impact.
The potential good news is that while the recent swap fee increase has made HXDM less attractive, the increased costs may also make the corporate structure more sustainable. I’ve done my best to model what the benefits could look like and discuss the potential risks. However, the biggest risks are always the ones you don’t see coming.
Disclosures: We don’t currently use HXDM. Our non-North American market exposure is via AVDV and XEF.TO, which are tucked away in our RRSPs and TFSAs.
*Thank you to Andrew Jones, CFA of Verified Beta, for helping with the tracking error analysis.
Great analysis, Mark. If you did have developed market stocks in your Corp (or personal non registered) accounts, would you use HXDM instead of XEF?
Hey Grant,
Thanks! I have done that in the past when we did hold some developed markets in a personal non-reg account before our RRSP space grew enough to accommodate it. We may have to again soon given how much the US has grown for rebalancing. We are both in a high tax bracket. So, it was worth the risks (for us). I am optimistic that the recent HEQT change and the fee increases will stabilize the corp class structure longer (we’ll see). In a corp, HXDM has a slightly larger advantage – the FWT issue is worse in a corporation. I am waiting to see the proposed capital gains increase for corporations officially die and then I’ll update that analysis. However, I suspect it could be quite attractive – especially if there is RDTOH trapping or a passive income problem. I am also coming to really appreciate being able to strategically control my corporate passive income as we move to our drawdown phase.
Mark
Thanks Mark for this and all your financial wisdom !
Is there a difference if HXDX is held in a Corporate savings vs. “Personal” ?
and confirming there is no advantage in registered accounts?
thank you
Paul
Hey Paul,
I plan to redo my corporate analysis once I officially see the capital gains tax changes die (hopefully). I would expect the advantage to be slightly higher in a corporate account because FWT in a corp is less tax efficient (dragging conventional a bit). If the corporation has a passive income problem (RDTOH trapping or passive income limit trouble), the advantage is massive. Here was my last take within a corp – it will be blunted by the increased swap fee a little, but could still be substantial.
I would not expect a reliable advantage for HXDM within a registered account. There is some fine-print behind that, that I may unpack in a future post. However, on the whole, conventional ETFs in an RRSP/TFSA are likely to have lower predictable cost drag.
Mark
Great analysis. Thanks. I think you have some decimal shifting on your MER/TER numbers though.
E.g. for ZEA you have MER of 0.22% and TER of0.6% for a total of .28% — I think you meant TER of 0.06% per https://fundfacts.bmo.com/EtfEnglish/BMO_MSCI_EAFE_Index_ETF-EN-CAD_Units.pdf
Yep. Thanks! Will fix it.
Mark
Thanks again for another thorough analysis! You mention holding XEF in your RRSP. I’ve been wondering about the trade-off of holding international equity in an RRSP vs taxable account. In both accounts you’ll have to pay foreign withholding tax. In the taxable account you can claim for the foreign tax credit but you have to pay regular income tax rates for the foreign dividends and interest. In the RRSP you lose the foreign tax credit but you can ‘defer’ paying the regular income tax on the foreign dividends and interest. Have you done an analysis to determine whether the tax deferral in the RRSP is worth more than the loss of the foreign tax credit? It would likely depend on an individual’s marginal tax rate I presume.
Hey Scott,
I did a while back. Generally the large foreign dividend size (~3%) made the tax on that greater than the loss to FWT. FWT on the Non-NA developed market ETFs is pretty low (8-9% or so). The lowest marginal tax rate is ~20% on the income. When looking at “post-tax” (accounting for tax deferral) asset location optimization, minimizing the annual loss to taxes is what determines location. Basically, the holdings with the largest tax drag get hidden in registered and the lowest gets bumped out when space is full.
I wrote about asset location just a bit here and some of the complexity in practice here. We have a corporation which adds a layer of complexity, but also increases the potential benefit of asset location because foreign income can be very inefficient in a corporation.
Mark