Sorting Out Canadian-listed ETFs vs USA-listed ETFs

I recently received an email asking if my ETF recommendations from our free eBook are still the same.  Specifically, do I still recommend purchasing USA-listed ETFs to get exposure to the American and international markets.

Before I get to why I have adjusted things slightly, I want to be clear that the main takeaway you should get from this article is to just keep passively investing in low-fee index investments. (ETFs are currently the best way to do this – but robo advisors are the easiest.  See our Wealthsimple Review here for more information.)  Far too often investors get bogged down in the minutiae about .02% difference in MER fees, or withholding taxes on dividends in a registered account versus non-registered account.  Understanding this stuff and geeking out about it is all fine and good if you’re a personal finance nerd like yours truly.  If on the other hand you find conversations like that boring, just follow the subtitle of our eBook and Keep It Simple!  The model portfolios I suggested within the book are still great and I would be just fine if I kept things exactly how they are.  PLEASE, do not get too distracted by the finer points, just worry about saving as much as you can and throwing it into passive investments.  Saving/investing as early as possible, with as much as possible, will be a far bigger factor in your eventual nest egg than the choice of what S&P 500 ETF you should be throwing money into.

With that caveat…

In the book I wrote:

The Canadian dollar cannot possibly stay at this equilibrium long-term. Due to our recent economic performance, and the slump the USA has been in, our dollar (CAD) has been artificially high for the last few years. This has meant that for much of my investing life, the Canadian dollar has been at par with the USD. As a history/business teacher I can say with a fair degree of certainty that this can’t be the case for much longer. Canada’s resource-driven economy will fall back to Earth, and the power of the USA machine will come back. These investments allow me to take advantage of this currency movement.

While my hope is that you are impressed by the accuracy of this prediction, I should mention that saying something will likely return to a historical average when it is at an all-time high isn’t exactly Nostradamus-level stuff.  I’m not big on speculating (hence the whole couch potato investing approach), but I just felt there was no way, when you look at the size of our respective economies, that the Canadian dollar was going to stay as high as the USD.  Obviously it has sunk substantially since I penned the first copy of our eBook, and consequently, my investment is probably worth about 25% more than if I had invested in the same index, using Canadian dollars and a Canada-listed ETF.

Change Is Good

Sorting Out Canadian-listed ETFs vs USA-listed ETFsMy other reason at the time for using some US-listed ETFs was that the fees for the equivalent ETFs in Canada were much higher.   This factor has radically changed since I wrote the book (even though my overall approach hasn’t changed at all).  With Vanguard, Blackrock/iShares, and BMO competing to offer the cheapest ETFs on the Canadian market, we’ve seen MER fees steadily decline to the point where they aren’t that far off their American counterparts.  We’ll get into this comparison in just a second.

What Is the Difference Between a US-listed S&P 500 ETF and a Canadian-listed S&P 500 ETF?

There are a few small differences in these products, but again, for the vast majority of folks reading this article, the point that needs to be highlighted is that they are much more similar than different.

For example, two ETFs that track the S&P 500 index have the exact same underlying investments.  The BMP S&P 500 ETF (ZSP) will put your money into the exact same companies, in the exact same percentages, that the Charles Schwab S&P 500 index (SWPPX) will in the USA.  Putting your money in either ETF means that ultimately you end up with identical slices of the largest 500 companies in the USA at any given time.  If you think about what that means, you’re likely to come to the conclusion that whether you buy the BMO ETF on the Toronto Stock Exchange (TSE) or the Schwab ETF on the New York Stock Exchange (NYSE), they are going to do almost the exact same thing in your account. (Casual investors, you have permission to stop reading now, and just go purchase some units of either product ASAP).

Related: 12 Tips For Understanding ETFs

The main difference between the two example ETFs I used is that the BMO offering would be purchased in Canadian Dollars and Schwab ETF would have to be bought using American Dollars.  If you’re a Canadian resident earning your paycheque in Canadian Dollars, and likely to be paying for your day-to-day life in Canadian Dollars, whatever the conversion rate is into American Dollars will obviously affect how much money you eventually end up with (not to mention the fee your brokerage will charge for converting the money).  From everything I’ve read, the long-term average of the CAD relative to the USD should be somewhere in the $.80-.85 range.  Unless we see our dollar skyrocket past parity again I would no longer bother with US-listed ETFs for my dull, boring, vanilla investing portfolio.

Related: My Top Seven ETFs for Young Canadian Investors

MER Fees and the New Canadian ETFs

Here’s the deal, it used to be if you wanted exposure within your portfolio to the US and international stock market the cheapest place to do that (by far) was the New York Stock Exchange.  Even if you had to eat a bit of a currency exchange fee, the long-term drag on your investments still made if worth it to buy your ETFs from the US guys.  Here’s how we stack up these days:

S&P 500 ETFs

ETFMER
BMO (ZSP).13%
iShares (XUS).11%
Vanguard Canada (VFV).13%
Vanguard USA (VOO).05%

 

S&P Total US Market ETFs

ETFMER
BMO (N/A)N/A
iShares (XUU).10%
Vanguard Canada (VUN).15%
Vanguard USA (VTI).05%

 

(Note: VUN & VTI have slightly different ways of tracking the USA stock market than XUU does due to slightly different indexes being used.  This is almost irrelevant as the returns will be extremely closely correlated)

Full International Exposure

ETFMER
BMO (ZEA).25%
iShares (IMI).21%
Vanguard Canada (VXC).25%
Vanguard USA (VT).17%

 

(Note: VXC is not exactly the same as IMI or ZEA, and might be more comparable to XAW – but is the closest thing Vanguard Canada has to a complete international ETF).

All of this to say that it doesn’t really matter who you go with at this point, all three of Canada’s main index-ETF providers are very competitive with each other, and their US counterparts.

Withholding Taxes

Now, if you want to get extremely technical (to the point you will likely know more about Canadian-listed US-equity ETFs than the people that sell them) check out our great infographic on where to put ETFs for maximum utility in both your RRSP and TFSA.  Long story short, you used to gain a bit of an added advantage by holding US-listed ETFs when it came to taxation on the dividends due to international tax considerations.  The point is basically moot!  Keep your US exposure in your RRSP (like we talked about in the free eBook)

Conclusion

To answer the email’s initial question: yes, I do buy different ETFs now to track the same indexes I did before.  I buy the equivalent ETFs from the Toronto Stock Exchange in Canadian dollars through my Questrade account – where I can buy them for $0 in transaction fees.  Once again, I just want to reiterate not to get too tied up in comparing all of this stuff.  Just Keep It Simple and select one ETF for your Canadian exposure, one ETF for your USA exposure, one ETF for your international exposure, and one ETF for bond exposure.  If you want to get even simpler, you can combine your USA and international ETFs, and have an entire portfolio consisting of three ETFs (re-balancing every so often) that will outperform almost every single Canadian mutual fund and individual investor over the long term!

17 Comments

  1. Fred on August 3, 2015 at 10:00 pm

    Great article Kyle, thanks!
    Just had a few follow up questions. In terms of the currency factor, isn’t it irrelevant when comparing VUN to VTI? Since VUN is unhedged, while you do pay for the currency conversion for VTI, VUNs value varies daily both with the value of the stocks in the index but also the currency rate from CAD to USD, which kinda “hides” currency exposure, but it’s still there. The only way to “protect” from currency variation would be to buy a hedged ETF, no?

    Also, at the end when you say keep your US exposure in your RRSP, do you mean as US listed ETF in a RRSP or the a CAD ETF such as VUN?

    Thanks!



  2. Kyle on August 4, 2015 at 8:23 pm

    Hey Fred,

    It isn’t irrelevant. First, I want to be clear, the ETFs that hedge currency are not worth the increased MER fees. You’re right that there would be no difference in the ability to purchase the underlying companies in each of the respective ETFs. The reason it is important is the simple currency conversion at different times. By purchasing VTI when the exchange rate is good for the CAD and then selling it when the exchange rate is not, you would make money – in theory. Long story short, going forward I don’t think there are enough reasons to go with a US-listed ETF for any reason.

    When I talk about keeping US exposure in an RRSP, I mean either US-listed (VTI) or TSX-listed (VUN).



  3. cashinstinct on August 5, 2015 at 7:40 am

    VUN value will change depending on exchange rate.

    It’s the same…

    The issue with us-listed ETF is the currency conversion cost charged by brokers.



  4. Kyle on August 5, 2015 at 8:22 pm

    Right, but correct me if I’m wrong here, if you convert your money into US Cash, buy VTI, the CAD dollar then sinks, and you sell VTI, then convert your investment to CAD, you would be making money on the exchange itself would you not?

    If you had bought VUN with CAD dollar and the CAD dollar sank, then you sold it, you wouldn’t have exactly the same result as the process above would you?



  5. Cashinstinct on August 6, 2015 at 9:34 am

    You would be making money on the exchange with both.

    With VTI, the price itself is in USD so it’s converted in CAD at purchase and when you sell.

    With VUN, the value of the ETF itself in $CAD will change depending on exchange rate, so when you sell, the value of ETF depends on the exchange rate at the moment you sell.

    Example:
    For the last year using Yahoo Finance: change in value
    VTI +8.16%
    VUN.TO +30.21%

    The reason VUN went up 30% compared to 8% for VTI is because of CAD-US exchange rate.

    The reason for buying VTI:
    – in RRSP, you will not have a 15% withholding tax on your dividends

    The reason for buying VUN.TO:
    – you will not be charged a forex conversion fee by your broker to buy it (if you don’t have $USD to invest).



  6. Kyle on August 6, 2015 at 11:52 am

    Right, I get you now. So, even when the exchange rate was favourable, it was almost irrelevant then. Thanks!



  7. g patel on February 8, 2016 at 3:13 pm

    Hi I ran some numbers When i compared end of day close price with S&P 500 index close level i found correlation coefficient of 0.61between VFV.TO close price and index close price. While same comparison of U.S. version ETF VOO correlation coefficient was 0.99.
    could you explain why VFV.TO does not exactly match S&P 500 index.



  8. Kyle on February 11, 2016 at 8:40 am

    Did you allow for currency conversion in your calculations G?



  9. Martin on March 13, 2016 at 10:18 pm

    I am a little late to the discussion but I have special questions I wanted to ask about some ETFs mentioned.

    In terms of performance/return, when I look at US versions such as VTI vs ITOT, or VOO vs IVV vs SPY, they offer very similar performance (when compared to each other, difference is minimal). But when I look at Canadian versions of those ETFs like VUN vs XUU, or VFV vs XUS vs HXS etc., performance differs a lot (when compared to each other). It looks like Vanguard is always behind and has the worst performance for its Canadian etfs (vs its competitors, similar etfs).

    So why would US versions of Vanguard etfs perform well (always compared to other US listed competitors), but Canadian versions seem to lose some return (vs other similar Canadian ETFs). Are there hidden fees? If you compare VFV vs HXS for example, the 3y return is 20.81% for VFV but 21.32% for HXS. There is a 0.51% difference. If that performance loss remains years after years, it can hurt after a while. Unfortunately there is very little return history for most Canadian listed etfs I mentioned, but with what I see, I am better of with XUU than VUN or better with HXS, XUS than VFV. Am I wrong?

    Thank you



  10. Kyle on March 14, 2016 at 10:55 am

    This is likely due to a tracking error Martin. It shouldn’t be a consistent loss, but rather a random occurrence. I would expect it to be less than .2% over the long term. Google “ETF tracking error” for more info.



  11. Sisi on March 21, 2016 at 5:30 pm

    Hello

    I am 28 yo and a new investor who’s trying to purchase Vanguard ETF.

    I’m looking to buy this following
    VAB 15%
    VFV 40%
    VXC 30%
    VIU (new) 15%

    I am looking to put about $21,000 under TFSA using Questrade. What do you think?



  12. Kyle on March 23, 2016 at 8:45 am

    It seems like an interesting starting point Sisi. While I am not supposed to recommend specific equities to folks, here’s a few questions I might consider:

    1) Why no Canadian equities?
    2) You’re getting a lot of the same exposure with VFV, VXC, and VIU. Any particular reason for these choices?
    3) Is there any reason not to just go 100% VXC for the equity portion of your portfolio if you’re allergic to Canadian content?



  13. Julian on January 31, 2017 at 10:53 pm

    Hi Kyle, Great post.
    If i can try to summarize the post and following comments in one sentence. “It ultimately does not really matter which one you buy, as the funds performance will vary due to currency fluctuations, or you will gain or lose when you convert your dollars. The main advantage of buying a Canadian version ETF, is the likely lower fees on conversion that you are getting.”

    Did I get it right?



  14. Kyle on February 2, 2017 at 9:09 am

    That’s about right Julian. There are also some minor tax considerations, but that’s the gist of it.



  15. Erin on March 10, 2017 at 7:49 pm

    Hi Kyle
    Knowing it’s been over 8 years since our last “crash” and the cycle they follow how would you suggest posing yourself to take advantage of this impending future? Sit on the sidelines with cash for now and then just buy closish to the bottom or is there a way to win on the way down and up?



  16. Kyle on March 11, 2017 at 10:01 am

    Hi Erin – I have to be honest and say that I have no idea what the markets do! Best idea is to just stay the course with a basic couch potato asset allocation – if you want the historical best answer that is.



  17. jeff on August 9, 2017 at 2:43 pm

    what about US estate tax exposure. Should be considered for larger portfolios holding direct US securities….



  18. Kyle on August 12, 2017 at 9:53 am

    I guess this would be a consideration for people holding accounts over $5 million Jeff (I see your point), but what % of people is that impacting? Like how many people in all of Canada have over $5 million invested in US equities?



  19. Melwin Dreger on September 22, 2017 at 6:29 pm

    I have $50k in USD sitting on my bank account.
    I have a questrade margin account.
    What ETF’s should I be considering or are there other alternatives I should be considering?



  20. Kyle on September 24, 2017 at 6:44 pm

    Hi Melwin,

    You might want to check this article out, then ask if you have any more specific questions. Personally, I’d use that money to get my US market access (assuming all else is equal).



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