Smith Maneuver Study 2024/2025

A closer look into the historical performance of the Smith Maneuver, and what we can learn from the results moving forward.

**Disclaimer: Past performance does not guarantee future results. The information in this report is for education and illustrative purposes only, and is not intended to be used as, or construed as investment advice. Seek the advice of a licensed investment processional before investing.**

*Please note market returns and interest costs are compounded for the measured periods. Results are rounded up/down to the nearest decimal. Complete dataset is available upon request with formal Smith Maneuver inquiry.

The first time I really started looking into the Smith Maneuver as a serious option for my financial plan, it almost seemed too good to be true. No additional mortgage payments, and thousands of dollars in profits? I was skeptical and had big questions including: Does this really work? Do long term market returns really beat the interest costs of a Home Equity Line of Credit (HELOC), and if so, by how much? What do the numbers look like?

So I commissioned a research report and worked closely with an Economist and Certified Financial Analyst (CFA) to answer these questions.

By digging into 50 years of Bloomberg data, including S&P 500 returns and the Canada Bank Prime Rate + 0.50% (standard HELOC rates), and applying the effects of Canadian income tax (marginal tax rate of 29.65% + Capital Gains on the investment sale), we see that the Smith Maneuver has in fact worked as a long term, profitable financial strategy.

While past performance does not predict future performance, this study revealed some important insights for the Smith Maneuver including:

Over 10 shorter term 5 year periods (totalling 50 years), the net after tax compound return on HELOC borrowed funds fluctuated more significantly, between -26% in the worst 5 year period and + 102% in the best 5 year period.
Out of the 10, 5-year periods measured (totalling 50 years), 7 resulted in a gain and 3 periods resulted in a loss.
Over 5 medium term, 10 year periods (totalling 50 years), the net after tax return on HELOC borrowed funds fluctuated less significantly, between a range of -20% and + 106%.
Out of the 5, 10-year periods (totalling 50 years), 4 resulted in a gain and 1 period resulted in a loss.
Out of 3 20-year periods we measured within the 50-year time frame, including 1974-1993, 1994-2013, and 2004-2023, the net compound returns after borrowing costs and income tax effects, were 147%, 194% and 246% respectively.
There was no 20-year period within the 50-year time frame, where the cost of borrowing would have surpassed the returns of the S&P 500.

So overall, the historical performance when using a simple S&P 500 index investing strategy looks compelling, but these insights teach us some important lessons about the Smith Maneuver:

Over shorter time periods, the Smith Maneuver resulted in losses more often. So with a greater expectation of potential losses over future shorter term periods, there needs to be a commitment beyond 5 – 10 years.
If the funds are withdrawn during a period of loss, the funds do not have an opportunity to rebound for longer term gains.
The target minimum commitment should be 20 years, if not longer.
Periods of higher interest and volatile markets in the 1970s and 1980s, and to a lesser extent between 2022 and 2024, would have required substantial discipline and the ability to manage higher interest rates and mortgage payments.
Averaging in funds, consistently over bull markets and bear markets moderates risk and volatility of the strategy.

The remainder of this article will review the data from this study. Specifically:

5, 10 and 20 year periods of BEFORE TAX S&P 500 returns and BEFORE TAX costs of a HELOC at Bank Prime + 0.50%
5, 10 and 20 year periods of AFTER TAX S&P 500 returns and AFTER TAX costs of a HELOC at Bank Prime + 0.50%
Most recent 20 years, between 2004 through 2023, of net after HELOC interest cost and S&P 500 after tax returns, applied to (1) An initial $100,000 investment and (2) $5000 per year invested

Comprehensive Borrow to Invest Return Analysis Report

This section analyzes the cumulative, compounded returns of the S&P 500 and cost of the Canada Bank Prime + 0.5% over various periods (5-year, 10-year, and 20-year) before tax. We assess the performance of the financial market and determine how often the S&P 500 outperformed the cost of Canada Prime + 0.5% expense. A positive net return means the S&P 500 outperformed.

1. 5-Year Periods Analysis (Before Tax)

This section compares the cumulative, compounded returns of the S&P 500 and cost of the Canada Prime + 0.5% over ten 5-year periods. We calculate the net return to determine how many periods resulted in the S&P 500 outperforming the Canada Prime + 0.5% expense.

Cumulative Returns for 5-Year Periods (Before Tax)

Years Canada Prime+ .05 S&P 500 Net Return

1974-1978 65% 24% -41%

1979-1983 109% 123% +14%

1984-1988 71% 104% +33%

1989-1993 62% 97% +35%

1994-1998 42% 194% +152%

1999-2003 33% -3% -36%

2004-2008 31% -10% -41%

2009-2013 18% 128% +110%

2014-2018 20% 50% +31%

2019-2023 28% 107% +79%

Performance Overview:

Outperformed (Positive Net Return): 7 out of 10 periods (70%)
Underperformed (Negative Net Return): 3 periods

2. 10-Year Periods Analysis (Before Tax)

This section compares the cumulative, compounded returns of the S&P 500 and cost of the Canada Prime + 0.5% over five 10-year periods.

Cumulative Returns for 10-Year Periods (Before Tax)

Years Canada Prime+ 0.5 S&P 500 Net Return

1974-1983 245% 175% -69%

1984-1993 176% 302% +125%

1994-2003 89% 185% +96%

2004-2013 54% 104% +50%

2014-2023 53% 211% +158%

Performance Overview:

– Outperformed (Positive Net Return): 4 out of 5 periods (80%) – Underperformed (Negative Net Return): 1 period

3. 20-Year Periods Analysis (Before Tax)

This section compares the cumulative, compounded returns of the S&P 500 and cost of the Canada Prime + 0.5% over 3 20-year periods.

Cumulative Returns for 20-Year Periods (Before Tax)

Years Canada Prime+0.5% S&P 500 Net Return

1974-1993 852% 1006% +154%

1994-2013 192% 483% +291%

2004-2023 136% 535% +399%

Performance Overview:

– Outperformed (Positive Net Return): 3 out of 3 periods (100%)

Investment Return Analysis- Part II

This section analyzes the cumulative, compounded returns of the S&P 500 and cost of the Canada Bank Prime + 0.5% (after tax) over various periods (5-year, 10-year, and 20-year). I have assumed an income of $57,375 for the Canadian investor living in Ontario and hence applied a marginal tax rate of 29.65% on return from Canadian Prime Rate + 0.50%. A standard net capital gains tax of 25% is applied to market returns.

1. 5-Year Periods Analysis (After Tax)

This section compares the cumulative, compounded returns of the S&P 500 and Canada Bank Prime + 0.5% (after tax) over 5-year periods. We evaluate whether the financial market (S&P 500) was greater than the cost of the Canada Prime + 0.5% expense and calculate the net return for each period.

Cumulative Returns for 5-Year Periods (After Tax)

Years Canada Prime +0.50 S&P 500 Net Return

1974-1978 43% 20% -23%

1979-1983 70% 85% 15%

1984-1988 47% 73% 26%

1989-1993 41% 69% 28%

1994-1998 28% 130% 102%

1999-2003 23% 0% -23%

2004-2008 21% -6% -26%

2009-2013 13% 89% 76%

2014-2018 14% 37% 23%

2019-2023 19% 77% 58%

Performance Overview:

Outperformed (Positive Net Return): 7 out of 10 periods
Underperformed (Negative Net Return): 3 periods

2. 10-Year Periods Analysis (After Tax)

This section compares the cumulative, compounded returns of the S&P 500 and Canada Prime + 0.5% (after tax) over 10-year periods.

Cumulative Returns for 10-Year Periods (After Tax)

Years Canada Prime +0.50% S&P 500 Net Return

1974-1983 143% 123% -20%

1984-1993 107% 191% 84%

1994-2003 57% 129% 72%

2004-2013 36% 78% 42%

2014-2023 35% 141% 106%

Performance Overview:

Outperformed (Positive Net Return): 4 out of 5 periods
Underperformed (Negative Net Return): 1 period

3. 20-Year Periods Analysis (After Tax)

This section compares the cumulative, compounded returns of the S&P 500 and cost of the Canada Bank Prime + 0.5% (after tax) over 20-year periods. It evaluates the net return to determine how many periods the S&P 500 outperformed the expense.

Cumulative Returns for 20-Year Periods (After Tax)

Years Canada Prime +0.50 S&P 500 Net Return

1974-1993 402% 549% 147%

1994-2013 114% 308% 194%

2004-2023 84% 330% 246%

Performance Overview:

– Outperformed (Positive Net Return): 3 out of 3 period

Most Recent 20-Year Period Return Analysis (2004-2023)

Net Return Annual and Investment Growth

Note: The investment returns are calculated using the net return (After-Tax S&P return – Canada Bank Prime + 0.5% After-Tax)

Year	Net Return Annual YoY (%)		Compound Growth of Investment Value ($100k)		Compound Growth of Investment Value ($5k each year)
12/31/2004	5%		104,780		5,239
12/30/2005	0%		104,545		10,216
12/29/2006	7%		112,098		16,315
12/31/2007	0%		111,617		21,224
12/31/2008	-31%		77,463		18,200
12/31/2009	18%		91,303		27,344
12/31/2010	9%		99,334		35,190
12/30/2011	-1%		98,422		39,821
12/31/2012	9%		107,767		49,076
12/31/2013	22%		131,240		65,855
12/31/2014	8%		141,422		76,352
12/31/2015	-1%		139,642		80,328
12/30/2016	7%		148,963		91,023
12/29/2017	14%		169,409		109,203
12/31/2018	-6%		158,462		106,824
12/31/2019	20%		190,852		134,680
12/31/2020	12%		213,143		155,995
12/31/2021	19%		254,489		192,225
12/30/2022		-19%		207,360		160,701
12/29/2023		14%		236,896		189,303

Summary of Key Findings:

Net Return per Year: The average YoY returns fluctuate significantly, with some years showing strong growth (e.g., 2013 at 22%, 2021 at 19%) and others with steep losses (e.g., 2008 at -31%, 2022 at -19%).
Cumulative Return on $100,000: The $100,000 investment has grown by 136.89% over the 20-year period, with a final value of $236,896 in 2023.
Cumulative Return on $5,000 Per Year: A $5,000 annual investment over 20 years resulted in a final value of $189,303. This is a net profit of $120,121 from the total contribution of $89,303.