Q: Under what specific circumstances would it be better to hold a US-listed ETF if there is a Canadian equivalent? For example, when it is preferable to use the Vanguard Total Stock Market (VTI) rather than the Vanguard U.S. Total Market (VUN)? — R. F.
Until late 2012, there really were no great options for Canadian ETFs that held US and international equities. If you wanted a low-cost, cap-weighted index fund that did not use currency hedging, you were out of luck. That’s why my Complete Couch Potato model portfolio currently uses a pair of US-listed ETFs for its foreign equity components.
But the case for using US-listed ETFs is not nearly as compelling as it used to be. Since April, iShares and Vanguard have launched inexpensive Canadian ETFs covering the broad US and international markets without currency hedging. For example, the Vanguard U.S. Total Market (VUN), launched in August, is virtually identical to the Vanguard Total Stock Market (VTI)—indeed, VUN simply holds units of VTI.
There are three important differences between these ETFs, however:
- VUN has a higher management fee: 0.15% compared with just 0.05% for VTI
- VTI trades in US dollars, which may result in investors incurring significant currency conversion costs
- VTI is exempt from the 15% US withholding taxes on dividends if it is held in an RRSP
VUN has the edge in taxable accounts and TFSAs
In my opinion, VUN should be the default choice if you’re holding US equities in a non-registered account or a TFSA. In these two account types, neither fund has any tax advantage: both ETFs are subject to the withholding tax on dividends. In a non-registered account, the tax is recoverable by claiming the foreign tax credit, while in a TFSA it cannot be recovered.
That means the only issues to consider in a taxable account or TFSA are the differences in management fees and the cost of converting currency. And in most cases, the foreign exchange costs will have a larger impact.
VUN’s additional management fee of 0.10% (the full MER will likely be a couple of basis points higher) amounts to just $10 on every $10,000 invested. That’s peanuts. If the alternative is paying your brokerage’s normal currency conversion rates (which may be upwards of 1.5%, or $150 on $10,000), then VUN is a no-brainer. Even if you’re comfortable doing Norbert’s gambit, remember this typically involves two $10 commissions and a small spread, so do the math and ask yourself whether it’s really worth it. It probably isn’t unless the transaction is very large.
VTI makes more sense in an RRSP
If you’re holding US equities in an RRSP, then it’s worth taking a closer look at VTI. With the yield on US stocks now at about 2%, the withholding tax represents an additional drag of about 0.30% for VUN. So now the total cost difference—including both the higher MER and the withholding tax—is more like 0.40%.
At that point it’s worth at least considering using Norbert’s gambit to convert your loonies to US dollars in order to purchase VTI. Again, however, the size of the transaction is important. Norbert’s gambit is usually not efficient unless you’re exchanging five-figure sums, so if you’re contributing a few thousand dollars a year to US equities, VUN is likely to be the less expensive option even in an RRSP.
And if you are willing to pay a little extra for the convenience of making all your trades in Canadian dollars (and there’s nothing wrong with that), VUN is likely the most appropriate choice in any type of account.
@William I’d tend to agree with your assessment. The case for using Norbert’s gambit and US-listed ETFs in non-registered accounts is not very compelling until the portfolio gets very large.
@Dan: How large would the portfolio be to make it compelling?
@Que: That’s really a personal decision. I’ve worked with many clients who find the whole idea of Norbert’s gambit a huge nuisance and they’re happy to have even six-figure holdings in Canadian-listed ETFs in their RRSPs. Remember that the additional drag due to foreign withholding taxes and higher MER might amount to 40 or 50 bps, or $40 or $50 annually for each $10,000 invested. Investors should balance that against the cost and inconvenience of Norbert’s gambit and decide what makes sense for them.
But if the portfolio is very large is that even more reason NOT to use US listed etfs? If death comes unexpectedly the estate taxes are brutal.
@Al: Under the current law, Canadians are not vulnerable to US estate taxes until their worldwide estate is over $5.34 million. At that point, yes, US-listed ETFs pose a potential problem.
@Dan: I thought the US was going to lower that 5+Million mark down to 1 million in 2013, is there a website link you could post that we can get to current rules?
@Que: I will echo Oldie’s comment that I have had little success importing data for ETFs listed on the TSX.
@Que: http://www.pwc.com/en_CA/ca/estate-tax-update/publications/pwc-2009-04-13-us-tax-exposure-canadians-2013-02-19-en.pdf
Thanks Dan and everyone for your comments. I want to reiterate that I am specifically addressing non-registered accounts. If I had non-FI in RRSP/TFSA, I would probably use NG and ETFs that directly hold their assets.
My goal is simplicity in the portfolio, within the parameters of low cost and minimal exposure to US estate tax issues. I In a different forum, HXS recommended for US exposure as well ( eg a portfolio of XIC, HXS, XEF and XEC). I looked at using XEF and XEC for non-NA exposure. This only saves about 3 bps on the total portfolio, so not very compelling for me. The HXS does save quite a bit on an after tax basis, so might be worth “de simplifying” things. Certainly has some regulatory risks attached though…
I wonder if we will see a CCP “3 fund portfolio” soon- VAB+XIC+VXC…
@CCP: I take it that this was a typo in your comment: I wouldn’t say I had LITTLE success, LIMITED success, perhaps.
As I said, my experience was that, for GoogleDocs spreadsheets at least, the formula I provided works very well for importing price data for non-ambiguously named ETFs on the TSX or wherever; the only glitch occurs with ETFs whose ticker symbol on the TSE is exactly the same as the ticker symbol for some other stock on some other stock exchange, usually the NYSE. My clumsy workaround for this is not very reliable, and I would welcome the help from anyone else who has figured out a way of reliably overcoming this major glitch.
@CCP: Oh, this puzzled me for a bit, because I remember making the comment you referred to, but I couldn’t find it in the previous comments here. Then I finally figured out that my comment to @Que was made on a DIFFERENT post, the March 15, 2012 post, to be specific; those readers wanting to read about my experience regarding capturing and displaying near real-time ETF price data on GoogleDocs spreadsheets can look here.
https://canadiancouchpotato.com/2012/03/15/a-spreadsheet-to-manage-multiple-accounts/
Hey,
My financial adviser told me that “Clients holding the [Canadian] Vanguard S&P 500 Index ETF (VFV.to) currently do not get US withholding taxes applied on their dividends received within TFSA`s and unregistered accounts.”
And for the US equivalent…
“US Withholding taxes of 15% to be applied on dividends received if account is deemed fully documented (as is the case for a TFSA)…would be 30% US taxes withheld if account was undocumented. This tax withheld is sent to US Internal Revenue Service as required by US authorities and may never be recovered. (If you hold US ETFs in RSP accounts withholding taxes don’t apply)”
What am i missing, or is she missing?? Has this changed since your article was published?
@Smartie: Your advisor is incorrect on the first point. If you hold VFV in any type of account, withholding taxes apply. In a non-registered account you may be able to recover this by claiming the foreign tax credit on your return. In a TFSA it would be lost.
She is correct on the second point. Canadians need to fill out a W-8BEN form when opening brokerage accounts to ensure that the withholding tax is applied at 15%. Typically the brokerage fills this out on your behalf, so it’s rare for anyone to actually have the 30% rate applied. But double-checking this with your brokerage cannot hurt.
@Couch Potato – I think now she meant that she doesn’t see it come off because it’s a Canadian fund… and the accounting happens before Vanguard Canada gets the dividends from Vanguard USA, so no taxes come out of my account??! Hmmm I’ll ask – meanwhile, is the same thing true of Capital Gains?
In that case it seems troublesome to hold Vanguard funds in a Canadian registered account, the 15% cut off the top seems like it might ruin the benefit of a TFSA. Would it be better to just hold All-World Ex-NA stocks?!
But Vanguard stocks are such a good deal, and the S&P 500 is a great performer.
In a non-registered account, you say the tax is recoverable but you’d then end up paying Canadian tax, right?
@smartie: Well, even if you don’t actually see the tax deducted, you are still paying it. You don’t see the MER deducted, but that doesn’t mean it’s not there. There is no withholding tax on capital gains.
Remember to put withholding taxes in context. 15% sounds like a lot, but it’s 15% of the dividend yield, and the yield on US stocks these days is less than 2%. So the cost of the withholding tax in a registered account is about (15% x 2% = 0.30%). That definitely does not ruin the benefit of a TFSA. As you point out, the alternative is holding the fund in a non-registered account where the dividends are fully taxable at your marginal rate (which is probably more than 15%) and the capital gains are taxable, too. It is almost always better to use registered accounts before taxable accounts, regardless of the asset class.
@smartie and CanadianCouchPotato:
“In that case it seems troublesome to hold Vanguard funds in a Canadian registered account, the 15% cut off the top seems like it might ruin the benefit of a TFSA. Would it be better to just hold All-World Ex-NA stocks?!”
The Vanguard fund VUN for Developed ex-NA achieves this exposure by holding US domiciled Vanguard FTSE Developed Markets ETFs. Doesn’t that mean the US withholding tax is still taken off the dividends on as well as the withholding foreign tax taken off the individual dividends depending on the tax laws and treaties that Canada may have with the individual nations involved?
Would the investor be better off in a TFSA by holding an ETF such as ZEA which undertakes to hold all foreign assets directly rather than through their US domiciled ETFs? That way they are only dinged on foreign withholding tax directly on the dividends of the specific EAFE assets depending on taxation laws and treaties, but spared any US withholding tax?
Now that CAD is on a downward trend I am looking at ways to realise the gains made in my US listed ETF’s, namely SPY, VWO, VEA, VPL, VGK. My plan is to use a Norbert Gambit approach, using interlisted CM as the vehicle to convert USD to CAD. My question is when I buy International etf,s in CAD should I buy hedged funds based on my belief that eventualy CAD will rebound or are there hidden costs involved with hedging.?
@archie: Yes, if you believe that Canadian dollar will rise in value then it makes sense to use CAD-hedged US or international equity ETFs that trade on the TSX. But hedging does have many downsides (search “hedging” on this blog for more). More importantly, trying to guess where currencies where currencies are headed can be equally costly. Ask anyone who tried to bet on where interest rates were headed.
@CCP: To drill a little deeper into your answer to archie, while acknowledging that trying to guess where the Canadian vs US exchange rate is headed is futile, would it be rational and acceptable to re-balance based upon current deviation of asset allocations from the original target, even though a large component of that deviation is due to the currently low Canadian Dollar?
What is your opinion of the new XHU and the best place to hold it given any withholding tax implications?
@Victor: I generally don’t recommend high-dividend strategies, especially with foreign stocks, since the dividends are fully taxable. If you hold XHU in an RRSP or TFSA it is sheltered from income tax, of course, but you would lose the 15% withholding tax on the dividends. Assuming a yield of 3%, that cost is about 0.45%. If you hold it in a non-registered account you can recover the withholding tax, but the entire dividend would be taxed at your full marginal rate.
https://canadiancouchpotato.com/2014/05/01/the-high-cost-of-high-dividends/
Is there any scenario where high dividend foreign stocks are useful?
We currently have our portfolio balanced to 30% Canadian (some in REITs), 25% US, 20% International, and 25% bonds. This allocation is largely based on one of your previous portfolio models. There is a mix of US and Canadian listed ETFs, tax sheltered and non-sheltered accounts.
We own a small business, so the non-sheltered accounts are held by our company. Because we have US clients, we get paid in US$, so we have purchased VTI and VXUS for the US and International portions of the portfolio. We are about to rebalance the portfolio and, because we are still learning the ins and outs of independent investing, we have two questions:
1) We are planning to sell the REITs (individual stocks – about 10% of the portfolio value) and reinvest the proceeds in VCN in order to simplify the portfolio holdings. Is this advisable?
2) We are assuming it would make more sense to continue buying VTI and VXUS for the business portion of the portfolio, considering the company already has the funds available in US$, instead of converting the funds to Canadian dollars and buying VXC. Are we correct on this assumption?
Thank you!
What about VUN vs. VFV
Both are in Canadian funds, but one is total market, where as the other is top 500.
Why would VUN be better investment than VFV, because it includes the smaller cap businesses?
Im leaning towards solely dollar cost investing in the VFV, being a canadian is there any downside to this?
@Gerry: I generally prefer total-market ETFs wherever possible for the extra exposure to med- and small-cap stocks. But Over most periods the difference between the S&P 500 and and the total US market is likely to be extremely similar, so this is not a huge decision.
Hi Dan, in regards US ETFs then do you have any views in regards the merits of Schwab ETFs? Given Vanguard’s recent announcement to include China A-shares in VWO then I am exploring alternatives and came across SCHE. In the process it made me realize that some Schwab ETFs appear to have lower expense ratios than popular Vanguard funds (e.g. SCHF 8bp vs VEA 9bp, SCHH 7bp vs VNQ 12bp, and seems others). Any insight welcomed.
@Ross: I have not looked at the Schwab ETFs too closely, but they seem to have a good menu of plain-vanilla, cap-weighted low-cost funds. For what it’s worth we use iShares IEMG for some of our clients.
Thanks @CCP, appreciated. I had looked at IEMG. Looks good. But I was trying to avoid duplication of South Korea exposure (SK equity, such as Samsung, is in VEA but also a hearty 15% of IEMG). Which led me to review Schwab combo of SCHF + SCHE and then for targeted other ETFs (Vanguard’s ETF comparison tool is great). Neither expressly seeking Schwab ETFs, nor previously owned any Schwab ETFs. Simply stumbled across them in a peer-review and determined similarly to your observation of ‘plain-vanilla, cap-weighted low-cost funds’. Noted negligible coverage of Schwab on CCP. Lots of choice/competition is a wonderful ‘problem’! Will see. Thanks again for your enormously informative articles.
Is there withholding taxes on Funds like VEE , VUN and VET?
When I hold VTI in my RRSP do I have to fill out any forms to save the 15% on the dividend or is it automatic ?
@CK: It should be automatic, but ask your brokerage if they have filled out a W-8BEN for you.
Hi
I currently have a side gig that pays me US funds every month. I have approx.: 15 k a year US to invest.
I am currently using the PWL 20FI-80EQ model.
I don’t have any RRSP room left but I do have TFSA room left. but I would have to put in a non Reg account as well. I have around 50 k US I need to either exchange or keep in US funds and add to my portfolio.
What would you recommend.
Thank you
HI again,
Sorry I do have around 12 k of room available for USD RRSP for this year.
Thank you,
@CCP thanks for the great content. I want to ask your opinion and help.
I have a scotiabank itrade account with RSSP and TFSA trading accounts set up. I used to have my RSSP managed by scotia but will move $80k to itrade and manage it myself. My question is, can I get the VFV (0% mer) if I want to own 100% US index S&P 500? I was planning to do something like:
15% bonds (ZAG)
15% Canada stocks (VCN)
35% Global stocks (XAW)
35% US index (VFV)
I guess all the above should go to my RSSP itrade section or can I move some of the $80k coming from RSSPs to the TFSA for any type of advantage? I guess not.
Can I get the VFV in the RSSP itrade account, or is best for tax purposes to get a different ETF? It may be that I am double buying the US index, but my goal is to have more of the US index and pay as little in the Mer as possible and have some international stocks as well, but at lower %
@Manny: I don’t understand why you believe the MER of VFV is 0%.
My mistake with that typo.
Hi,
Thanks for your great article. What if I have US dollars and want to invest it instead of leaving it in my bank account?
Could you please elaborate on that? Does it make sense to buy VTSAX or VTI in that case?
Thanks!
@Amir: You won’t be able to buy VTSAX, which is a US mutual fund not available in Canada. You can always buy US-listed ETFs in a taxable if you have USD that you don’t want to convert, as long as you understand that it’s a little more difficult to do the bookkeeping.
As always, thanks for the great post.
I understand that the withholding tax is recoverable in non-registered accounts for VUN, a US equity ETF. Are withholding taxes also recoverable with International equity ETFs, such as XEF?
Are there any gotchas to be aware of? For example, I am aware that to be exempt from the US withholding taxes in an RRSP, the ETF must be US-listed (ie. use VTI, not VUN). Is this not a factor for non-registered accounts? Is it OK that the Canadian listed ETF simply hold it’s US-listed counterpart, vs. holding the individual stocks directly?
@gocanada: This can be a complicated topic, which is discussed at length here:
https://canadiancouchpotato.com/2016/07/11/foreign-withholding-taxes-revisited/
Specifically:
– “Are withholding taxes also recoverable with International equity ETFs, such as XEF?” Yes, these amounts will appear on your T3 slips and would qualify for the foreign tax credit. See Type B ETFs in the white paper. See Type E ETFs in the white paper.
– “I am aware that to be exempt from the US withholding taxes in an RRSP, the ETF must be US-listed (ie. use VTI, not VUN). Is this not a factor for non-registered accounts?” US-listed v. Canadian-listed is not a factor in non-registered accounts, because there is no exemption: the tax is withheld from both US- and Canadian-listed ETFs in non-registered accounts, but in both cases you can recover it. Compare Type A and B ETFs in the white paper.
– “Is it OK that the Canadian listed ETF simply hold it’s US-listed counterpart, vs. holding the individual stocks directly?” In a non-registered account this is not a factor for ETFs holding US stocks, because there is only one layer of withholding tax, which is recoverable. For Canadian ETFs holding foreign stocks, it is preferable for the stocks to be held directly (Type E in the white paper) to avoid incurring two layers of foreign withholding tax (compare Type D), because only one would be recoverable.
Many thanks – I will pour over the white paper!
@Couch Potato Would this be different if part of my income is USD, I can transfer it to my brokerage as USD?
Say I get a mid-4 digit USD into my RRSP as a lump, and for the US and international portion, is there a big difference between VTI and VXUS vs VUN and VXC?
@calyth: If you have a source of USD income, then it certainly makes sense to use US-listed ETFs in your RRSP. If you never have to do the currency conversion then I would recommend using VTI/VXUS (or a similar combination) over their Canadian-listed counterparts.
Thanks for this post. I’ve been learning a lot from this site.
I get paid in USD. Some of this will go to us ETFs in RRSP where I get the withholding benefit.
Obviously I need to convert some to CAD to spend. For the rest of my portfolio would there be any reason I would want to convert to CAD?
It seems to me that the lower mer on the us ETFs as well as saving the conversion fees makes it a no brainer to keep us ETFs in TFSA and non-registered.
@Daniel: You can certainly keep most of your invested funds in USD if you want, but it’s definitely not a no-brainer. US-listed ETFs in a TFSA will generally have higher foreign withholding taxes than Canadian-listed ETFs, which will wipe out any MER advantage. In a taxable account, your bookkeeping will be much more difficult, and you will likely need to complete a T1013 to report your holdings to CRA. Moreover, wouldn’t you want to hold some fixed income and Canadian equities in the portfolio? Both of these should be denominated in CAD.
It might make more sense to do Norbert’s gambit a couple of time per year and keep the bulk of your investment portfolio in CAD, with the exception of equities held inside an RRSP, where there is clearly an advantage to using US-listed ETFs.
just wondering why VUN seems to be outperforming VTI over 10 yr period by 30% according to google finance
@John: The performance of VTI is expressed in USD, while the performance of VUN is expressed in CAD. If you held VTI and measured your return in CAD, it would be very similar to that of VUN:
https://canadiancouchpotato.com/2014/01/13/how-a-falling-loonie-affects-us-equity-etfs/
https://canadiancouchpotato.com/2014/12/05/decoding-international-equity-etf-returns/
Hi Dan:
I’m a DIY investor and huge fan of your work and fan of etfs.
But I have a nagging curiosity about two etfs’ fees especially since there’s a fee war out there. To illustrate:
First VUN — Both VFV and VUN basically hold their parent US etfs. For example, VFV Mer is .08% (vs .03% for VOO) – a reasonable difference. But VUN’s MER has been .16% for years and yet the underlying VTI MER has steadily decreased over time and it is now .03%.
XIU- Also, closer to home, the MER for XIC has I believe been coming down and it is now .06%
. But the XIU’s MER has remained stuck at .18% for years.
So, why haven’t the MERs of XIU and VUN budged despite the fact that they both have amassed a lot of assets (especially XIU) which should justify fee reductions?
Thank you.
@Babak: Vanguard’s reluctance to lower VUN’s fee is hard to explain, especially since the iShares equivalent (XUU) has an MER of 0.07%. The fee on this fund really should be lowered, I agree, and I would be surprised if it didn’t happen fairly soon.
The explanation for XIU is easier. This ETF is unique in Canada: it’s actually one of the oldest in the world, and even though it has been losing assets for some time it’s still the largest in Canada with about $9 billion in assets. If iShares cut the fee by 10 basis points it would cost them $9 million in annual revenue. And they don’t really have a huge incentive to do so. XIU is widely held by institutional investors who value its liquidity and tend to be less fee-sensitive than individuals. It’s also used by short-term traders who are indifferent to MERs because their holding periods are brief. So the fee may come down some day, but I wouldn’t bet on it.
Hi Dan,
I really love your blog. I wonder if you have an updated version of this article, as this one is 8 years old?
I also wonder, as a Canadian resident, what US ETFs I should consider for my registered and non-registered accounts. I currently have VEQT in my registered account. I want to achieve similar result (if that makes sense) with my US investments. My knowledge regarding US ETFs/index funds is next to zero.
Thank you so much!
Enjoy the holidays!