Cost Versus Convenience in “ex Canada” ETFs

I used to own one of those one-piece cutlery tools designed for hiking and camping—the kind with a knife, fork and spoon that all fold into a single unit. It was hardly ideal for eating, especially if you needed the fork and knife at the same time. But it was more convenient than trekking around with three individual pieces of flatware that might tear your pack or get left behind on the trail.

As investors we often make similar trade-offs. Consider the Vanguard FTSE Global All Cap ex Canada (VXC) or the iShares Core MSCI All Country World ex Canada (XAW), which both offer one-stop global diversification by holding thousands of US, international and emerging market stocks. But as with folding cutlery, you give up something to get that convenience. These two “ex Canada” funds get at least some of their exposure by holding underlying US-listed ETFs rather than holding their stocks directly. This structure can result in additional foreign withholding taxes on dividends.

In a recent blog post, Justin Bender estimated the impact of foreign withholding taxes on RRSP investors who hold VXC. He then considered how investors might reduce those taxes by instead holding its four underlying US-listed ETFs. The results were pretty dramatic: if you also factor in the management expense ratios, the total cost of VXC in a retirement account is 0.71%, compared with just 0.19% for the US-listed ETFs.

For investors who use XAW, the drag caused by foreign withholding taxes is somewhat smaller, because not all of its stocks are held via US-listed ETFs. But the overall cost is still substantially higher than it would be if you held the underlying funds directly in your RRSP.

Because of these savings in management fees and taxes, we generally use US-listed funds for our clients who hold foreign equities in RRSPs and related accounts (such as LIRAs and RRIFs). But when we work with DIY investors we typically recommend Canadian-listed options, whether it’s a single-ETF solution like VXC or XAW or a trio of funds covering US, international and emerging markets separately.

Why the inconsistent advice? Because with any investing decision, you need to consider the bigger picture rather than viewing a single factor in isolation.

A fair exchange

While the cost of holding US-listed ETFs is lower compared with their Canadian counterparts, the cost of purchasing them can be much higher. While most brokerages now allow you to hold USD in registered accounts, they still tend to gouge you on currency conversion. Unless you are able to convert your loonies to US dollars at a very low rate—for example, by using Norbert’s gambit, as we do—the advantages of US-listed ETFs will be reduced.

It’s not unusual to pay 1% to 1.5% when converting modest amounts of money (under $50,000 or so) at an online brokerage. If holding US-listed funds reduces your MER and foreign withholding taxes by 0.52%, as Justin estimates, it would take two or three years to break even compared with simply using Canadian ETFs. And don’t forget you’ll likely want to convert your currency back to CAD when it comes time to draw down your RRSP in retirement. That would add another two or three years to the break-even period.

In my experience with DIY clients, Norbert’s gambit often seems confusing and a bit intimidating. When I present the choice and explain the differences in cost, most investors prefer to accept the higher cost for the added convenience of trading only on the TSX.

Keep ’em separated

Even if you agree that holding Canadian-listed ETFs is the way to go, why not hold three separate ETFs for US, international and emerging market equities instead of getting your knife, fork and spoon in a single fund like VXC or XAW? After all, the overall MER would be lower and you’d be able to customize your asset mix.

That’s a perfectly good option, and Justin’s own model ETF portfolios are built that way. Indeed, in the hands of an experienced portfolio manager, separating these asset classes adds more flexibility. With our clients we’re often managing large portfolios with multiple accounts and we may wish to hold, for example, international equities in an RRSP and US equities in a non-registered account. You can’t do that with a single “ex Canada” ETF.

However, holding individual ETFs also complicates your portfolio by adding three moving parts instead of just one. That means significantly more rebalancing, which carries costs in the form of trading commissions, bid-ask spreads and capital gains taxes in non-registered accounts. With small portfolios you may find yourself making frequent small trades, especially in emerging markets, since that ETF will likely have a target of just 2% to 5%.

More important, separating these asset classes adds another behavioural challenge. During the periods when the US is running well and international and emerging stocks are struggling, it’s easy to succumb to the temptation to buy what’s hot instead of what’s below its target—which, of course, undermines the whole idea of rebalancing. With a single ETF for all your foreign equities, there are fewer opportunities to make that mistake.

Using a fund like VXC or XAW might not be the optimal choice, especially for experienced, disciplined investors with large portfolios who are able to do currency exchange cheaply and trade at low cost. But for those who are focused on getting broad diversification with low fees and minimal complexity, an “ex Canada” ETF is still a useful tool to keep in your pack.

 

48 Responses to Cost Versus Convenience in “ex Canada” ETFs

  1. Adam June 20, 2016 at 11:57 am #

    Another great article, thank you. I personally hold iShares (XIC, XUS, XEF, XEC) and Vanguard (VAB) for our portfolio, and do not wish to complicate our portfolio further in case anything happens to me and my better half takes over. She is comfortable with the current approach; adding norbert’s gambit, however effective, would begin to make it daunting. That’s why we hold the funds that we do. We’re willing to pay for that extra convenience of holding things in Canadian dollars, especially considering that our costs are so much lower holding and managing our own funds this way than having someone else do it for us. 🙂

  2. Kurt June 20, 2016 at 1:13 pm #

    This information would have been useful when you rolled out your new model portfolios. I had previously been using a variation of the complete potato, with VTI and VXUS, which I have since replaced with VXC based on your new model portfolios (shutting down the US account at my broker). I’ve really liked the simplicity of the change, but I didn’t realize I’m giving up about 0.5% in returns on that portion of my portfolio by doing this. I don’t know if I would have done anything different if I knew that, but it would have probably at least made me pause. Norbert’s Gambit is a bit of a pain, but I did it a few times without any trouble.

  3. Gerry June 20, 2016 at 3:58 pm #

    Hi Dan, Thank you for the great information. My portfolio is based on your ETF model portfolio. The taxable accounts hold VCN and VXC and the registered accounts holds VAB and VXC. After reading this article I’m wondering if VXC should be in my RRSP. The amount of withholding tax on VXC, at .52%, would be several hundred $ in the RRSP.

  4. Canadian Couch Potato June 20, 2016 at 4:03 pm #

    @Gerry: Again, always consider the big picture. If you hold your entire VXC holding in the taxable account, what are you going to hold in your RRSP?
    http://canadiancouchpotato.com/2015/01/30/the-wrong-way-to-think-about-withholding-taxes/

  5. Gerry June 20, 2016 at 4:11 pm #

    Sorry I wasn’t very clear. I could swap VXC with VCN.

  6. Tristan June 20, 2016 at 4:51 pm #

    @Kurt: Don’t feel bad. I think for all investors, but particularly DIY investors, to quote Ben Carlson “Simple beats complex, but simple is much harder to implement because simple will always sound more intelligent and feel more comfortable to buy into.” Or, as Jack Bogle puts it “Simplicity is the master key to financial success.”

  7. Be'en June 20, 2016 at 4:54 pm #

    How about using just one equity etf covering the entire worlds stock market in an account? Will that be too simple with too many disadvantages?

  8. Robert M June 20, 2016 at 5:18 pm #

    Thanks for a great article. I am one of those DIY investors that prefer simplicity and use TSX listed funds. I have to keep reminding myself that the real benefit for myself is moving from the expensive (non-index) mutual fund route to the ETF route. That is where my greatest savings are realized.

    I would look at migrating to a more tax advantage strategy by making the case that the tax savings would be used to offset the cost of a for fee advisor. If the advisor can drive the portfolio cost down then you can look at the increase in costs (fund fees + advisor fees) as a discount against the stated fees.

    The last time I calculated my portfolio costs, I was around 0.35% down from 2.5% with expensive mutual funds. If I could get an advisor service and keep my fees under 1%, then that might convince me to hire the advisor.

    Currently, advisors charge about 0.5% to 1.5% depending on the portfolio size. But, the estimated savings are never factored in simply because it is so hard to estimate.

    However, it is that saving which helps to justify a fee for service advisor and which I need to factor in the next time I review the protfolio.

    Thanks again, Dan.

    Have a great summer.

  9. George June 20, 2016 at 6:20 pm #

    Yikes, Im glad i stuck with VTI and VXUS as I do have to spread around various accounts-registered and non registered. I’m a diehard indexer, VAB, VCN, VTI, VXUS and Norbert’s gambit. This combo runs around .01%- .2% and simple.

    I toyed with using all world (VT) and VAB but more expensive (bad) and all in American dollars (also bad). However it did represent Canada’s contribution to the world. I just tried the gambit with a small amount on my first time which would have lost money, but allowed me to get comfortable with the procedure.

    With a simple account VXC and XAW may be fine, but .71%!!!!! A large account can get discretionary moneymanagement for that. I personally am not comfortable with that real fee for an index. It likely takes away most of the advantage of indexing. There was a previous article that showed the actual total fee’s of the various Canadian products (XUS etc) and a chart on how long to make up the fees. It steered me away from VXC on release.. I think if you are already up to .71% a good option is just going tangerine and eating a little more cost. No brokerage fees, auto rebalance, and on accounts of $100,000, only $350 buck year extra management fees.

    I have heard rumours of target date accounts coming to Canada. Is there any truth to this? That would be the ultimate in simplicity.

  10. Joshua June 20, 2016 at 8:56 pm #

    Other than using Norbert’s procedure to buy U.S. ETFs to minimize cost, is it possible to do it simply for the exchange rate? For example, is it possible to transfer the U.S. dollars bought through the procedure directly into my RBC US currency savings account?

  11. Canadian Couch Potato June 21, 2016 at 12:34 pm #

    @George: A lot of ideas here, and I think there is some confusion.

    Foreign withholding taxes cannot be said to “take away most of the advantage of indexing.” They are not specific to index funds, nor are they specific to ETFs.

    Let’s also remember that this higher cost only applies to US and international equities held in registered accounts. In a typical balanced portfolio this may be only 40% or so, so your all-in cost for most investors using an ETF portfolio that included VXC or XAW would not be anywhere close to 0.71%.

    As for the comparison to Tangerine, there a couple of things to understand. First, withholding taxes also apply in these funds if they’re held in an RRSP or TFSA. They will be somewhat lower than VXC because most of the international stocks seem to be held directly by the mutual fund, and therefore there is only one level of FWT. But the amount paid on the US portion is exactly the same.

    Regarding target date funds, these already exist in Canada, particularly in group RRSPs and pensions. They are not common for self-directed investors yet, but may be in the future. Just remember that as RRSP investments they have all the same issues with foreign withholding taxes.
    http://canadiancouchpotato.com/2016/04/18/are-target-date-funds-right-for-you/

  12. phil June 21, 2016 at 12:36 pm #

    Is there a $ amount that becomes a concern when holding us listed etfs in rrsp for tax purposes?

  13. Canadian Couch Potato June 21, 2016 at 12:37 pm #

    @Be’en: You could do that using a fund such as XWD, but you would have to be comfortable holding only 3% or 4% in Canada, with all of the currency risk and “behavioural risk” that entails.

  14. Canadian Couch Potato June 21, 2016 at 12:40 pm #

    @Gerry: This is a classic example of burning a few dollars of gas to save a few pennies, as explained in the post I linked to. By putting Canadian equities in an RRSP and foreign equities in a taxable account you would be electing to pay a lot of income tax to save a small amount of foreign withholding tax.

  15. Diego Revere June 21, 2016 at 1:22 pm #

    Great article again! Thanks.

    I think that US estate taxes could be another important consideration for some investors, and another potential benefit to holding VXC vs it’s four US ETF components. In the above comment from Adam, he referenced that he likes the simplicity of the iShares (XIC, XUS, XEF, XEC) and Vanguard (VAB), which are all Canadian-listed ETFs. If he passed on, Uncle Sam wouldn’t take a big piece of those investments. However, if Adam held VXUS and VTI (US-listed ETF’s) and he passed away, US estate taxes would take a bite out of those investments in a personal account, TFSA, or RRSP. My understanding is that US estate taxes would not apply in a corporate account. I’m just a regular guy, without any accounting or investment education other than from books and blogs and I might be wrong about this, so someone correct me if my understanding is incorrect.

  16. Canadian Couch Potato June 21, 2016 at 1:58 pm #

    @Diego: US estate taxes could be an issue, but only for very wealthy Canadians. This paper provides a good overview of the issue:
    http://www.bdo.ca/en/Library/Services/Tax/Documents/Tax-Bulletins/US-Estate-Tax-Issues-for-Canadians.pdf

  17. Shaun June 21, 2016 at 2:17 pm #

    @ Dan,
    Great post. These are the important questions that investors should be asking rather than market timing and individual stock selection.

    A couple points:
    1) I believe Foreign Withholding Tax considerations are even a larger drag for high yield foreign investments that are wrapped like REITs (CGR), and Emerging Market Bonds (XEB), and to some extend Emerging Markets (VEE or XEM etc). This is a very important consideration for anyone contemplating indexing in some sectors beyond the plain vanilla.

    2) While I agree that all foreign funds are subject to foreign withholding tax, the compounded effect of the wrap is certainly not. As I understand it the wrap effect adds a hidden drag of about 0.3%, dependent on the yield. While not unique to ETFs, there certainly seems to be a higher percentage of ETF’s that are structured this way than index mutual funds, or dare I say active mutual funds.

  18. John H June 22, 2016 at 3:51 am #

    Does this issue of FWT “drag” also apply to the TD US and International index mutual funds?

  19. Canadian Couch Potato June 22, 2016 at 8:38 am #

    @Shaun: There should be no withholding tax on emerging market bonds: FWT applies only to dividends, not interest. And there is no specific issue with foreign REITs: it’s just that REITs tend to pay higher distributions than other stocks, so the effect of FWT is greater. That is one of the reasons why choosing high-dividend US and international funds is usually not a good idea.

    @John H: Yes, FWT applies to the mutual funds as well:
    http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/

  20. Kurt June 22, 2016 at 9:49 am #

    To put it in real $ values, with a $250K portfolio, with 40% US/world equities ($100,000), would using VXC in an RRSP would cost you approximately $500 / year more than using VTI + VXUS? It’s not a huge number, but it’s also not insignificant.

  21. Canadian Couch Potato June 22, 2016 at 10:05 am #

    @Kurt: You’re asking the right question. Problem is, while we can estimate the foreign withholding tax fairly easily, it’s harder to estimate the cost of using VTI and VXUS. How much are you paying to convert that $100,000 CAD to USD? If it’s 1% (and that’s charitable), it would be $1,000 the first year. Then there’s more currency conversion whenever you add money, and twice as many trading fees when rebalancing two funds instead of one. It can definitely still be preferable to use the US-listed funds, but the cost difference is not necessarily as dramatic as it seems at first.

  22. Ramona June 22, 2016 at 10:31 am #

    Thank you for all your important and useful info and resources!
    Q – I have recently moved some of my money to Vanguard from TD e series funds. There is now many choices with Vanguard for index funds. Does is make sense to spread out the investments similar to your portfolio recommendations for the e series funds? US Equity, Can Equity, Non Can Global and Can Bond.
    What is your opinion on the VFV fund S&P Index ETF? IS there any benefit to owning this fund versus the others?

  23. Kurt June 22, 2016 at 4:09 pm #

    I was successfully doing Norbert’s Gambit before, so my currency conversion costs would be minimal. The cost of the US account is $50/year, I think, and I’d be doing a few more trades – possibly another $50/year. So I’d guess the with a $250K portfolio ($100K in VTI and VXUS instead of VXC), you save ~$400 but have the headache of more complex rebalancing and doing Norbert’s Gambit. For bigger portfolios, the savings would go up proportionally. I’m not going to rush out and do this change at the moment, but I’ll keep in in mind going forward.

  24. Canadian Couch Potato June 23, 2016 at 9:58 am #

    @Ramona: Option 3 of my model portfolios includes my recommendations if you’re using Vanguard ETFs. There are other options that work well, too (including VFV for US equities), but it is easy to get overwhelmed by the choices. Just keep it simple!

  25. Scotty June 23, 2016 at 11:27 am #

    I think you’d need quite a large portfolio ($1M+) to even start considering unbundling VXC (or XAW). Justin Bender’s post (in the comments) shows that XAW’s all-in cost is 0.54%.

    So 0.54% minus the 0.19% you could get by unbundling is 0.35%. However, typical portfolios only hold ~40% of XAW, so the total portfolio cost increase is actual 40% * 0.35%, or 0.14%.

    Not worth switching at all. Just a few years ago we were all paying 0.5%+ for our portfolios. New products came out and there has been a race to the bottom. No way, as an individual, am I going to add 6 more steps to balancing my portfolio to save 0.14%. Who even knows what happens after you execute the currency exchange.

  26. Nathan June 23, 2016 at 12:35 pm #

    Thanks for writing a great article, much appreciated as always. I’m currently using CIBC and based on my previous US trades they charge between 0.1% to 1.0% when compared to the spot price for currency conversion. Since they only allow CDN $ in my RRSP, all dividends from US stocks are automatically converted, which leaves me thinking of keeping VFV or switching to a different company that allows dual currency accounts.

    Personally, I sold XAW to buy the individual ETF’s in order to balance them between my RRSP and TFSA. Also, my asset allocations have a lower % of emerging markets (more XEF) and with XAW I can’t make that change.

  27. Kathy June 23, 2016 at 12:56 pm #

    Re: “…you would be electing to pay a lot of income tax to save a small amount of foreign withholding tax…”

    I read the referenced article but it doesn’t take into consideration people who have a marginal tax rate of 0%. I don’t know “Gerry’s” situation but I’m half of a retired couple who manages to keep our annual income below the sum of the basic personal, age amount and pension income tax credits. (Though in future maybe we should boost our income a little so we can recoup that foreign tax credit?)

    And, because the portion of our portfolio that is in the international index fund is 10 times higher than the example on that page, given the same conditions we would lose $300, not $30, to foreign with holding taxes.

    In cases like ours would it make more sense to swap the international equity ETF in our taxable account with the Canadian equity ETF in our registered funds?

  28. Canadian Couch Potato June 23, 2016 at 1:29 pm #

    @Kathy: Hard to answer without knowing all of the details, but in general, if you’re in a 0% tax bracket any decision about tax-efficiency in your portfolio is likely to be trivial and could have unintended consequences.

    @Natahan: CIBC is an interesting case. Because they do not allow USD in registered accounts, they apparently offer currency conversion at a very favourable rate. However, they’re not very transparent about this. You might try asking them and see what they say.
    https://www.reddit.com/r/PersonalFinanceCanada/comments/32z349/currency_conversion_charges_at_cibc_investors/

  29. Nav June 23, 2016 at 6:26 pm #

    Thanks for another great post. So just to be clear here for myself. I have my “ex-Canada” stocks split into VUS/VEE/VEF in a non-registered account which was your recommendation a model portfolio a few years ago. Now my portfolio is getting quite large and I was thinking of switching to something like VXC for the overall MER reduction and increased convenience. Would the cost of the potential currency conversion outweigh the cost of the foreign withholding tax? Would it be wise to switch or stay on the same course?

  30. Canadian Couch Potato June 24, 2016 at 7:58 am #

    @Nav: The combination of VUS/VEE/VEF has a lower MER than VXC, so switching to a single fund might be more convenient but it would not be cheaper. And currency conversion is not an issue here: both options are traded in CAD. Finally, in a non-registered account the foreign withholding taxes are less of an issue because the first layer is recoverable. Bottom line, if you are using VUS/VEE/VEF there is no reason to switch unless you’re finding it to difficult to rebalance with the three funds.

  31. Lasith June 26, 2016 at 7:42 pm #

    Hi Dan. Thanks for the great article. I’m in the same situation as many DIY investors have been at one point or another: whether to go with a US listed ETF like VOO or a Canadian listed US equity ETF like VFV. I am leaning towards VFV specially now that the costs have come down, but one thing that concerned me is the treatment of capital gains distributions and ROC.

    In one of your previous articles you mentioned that capital gains distributions and ROC from US listed ETFs are fully taxed as foreign income and does not affect your ACB (the Schmidt case). However, you pointed out that US listed ETFs (other than REIT ETFs) rarely have capital gains distributions or ROC. And indeed, when I look at distributions of VOO over the past couple of years, it has not.

    However, when I look at VFV, it has had capital gains distributions for the past 4 years and ROC for the past 2 years. Based on this information, I have a few questions:

    1. Do ROC and capital gains distributions for Canadian listed US Equity ETFs like VFV follow the regular Canadian ETF tax laws (like ROC is not taxed, capital gains distributions taxed at 50% of the marginal tax rate, both impact ACB) or do they follow the Schmidt ruling?

    2. Why is it that VOO does not have any capital gains distributions and ROC, but VFV does? I though VFV simply holds VOO.

    3. It seems like in the distributions section for VFV, that Vanguard has paid the 15% withholding tax on the capital gains distribution and ROC on top of the cash dividend. Why is that? I would have thought that they would only pay the 15% withholding tax on the cash dividend.

    Thanks for your help Dan!

  32. Canadian Couch Potato June 26, 2016 at 8:50 pm #

    @Lasith: Thanks for the comment.

    1. Canadian-listed ETFs that hold underlying US-listed ETFs are subject to all of the same tax rules as those holding the stocks directly. So ROC distributions are not taxed (though they lower your cost base) and capital gains distributions have the same 50% inclusion rate.

    2. Although VFV uses VOO as its underlying holding, it is still a separate fund and it can distribute ROC as it wishes. Same with capital gains distributions: funds like VFV can realize gains even if the underlying holding does not. A long-standing fund like VOO probably has a lot of carried-forward losses it can use to offset future gains, but a newer fund like VFV won’t benefit from that.

    3. No fund should be deducting foreign withholding tax on ROC or capital gains: can you explain why you think VFV is doing this?

  33. Lasith June 27, 2016 at 6:38 pm #

    @CPP: Thanks for the clarifications. Its really helpful!

    Regarding my third question, the reason I believe VFV is deducting withholding tax on ROC and capital gains distribution is because this is the distribution table Vanguard has in its website for VFV: https://www.vanguardcanada.ca/individual/mvc/etf-distribution-history.html?portId=9563 (see the second table at the bottom of the webpage).

    For 2015, it lists its distributions as:
    – $0.01007 for capital gains distribution
    – $0.00131 for ROC
    – $0.96458 for foreign income (i.e. cash distribution)
    – $0.14639 for foreign tax paid

    As you can see Foreign Tax Paid ($0.14639) = 0.15 * ($0.01007 + $0.00131 + $0.96458)

    This is why I think VFV is deducting withholding tax from ROC and capital gains distributions.

  34. Canadian Couch Potato June 29, 2016 at 10:49 am #

    @Lasith: I can understand this logic, but I suspect there is just a rounding error here somewhere. I’ve noticed that the FWT on US equity funds is usually very close to 15% of the dividends paid, but not exactly. This probably has to do with the timing of distributions during the year as the fund also experiences inflows and outflows. There is no reason for a fund to apply foreign withholding taxes on ROC or capital gains distributions.

  35. Justin Bender June 30, 2016 at 9:52 am #

    @Lasith: The discrepancy is most likely due to the MER. The gross dividend that is subject to the 15% withholding tax is before MER (and is not disclosed on the site), while the foreign income figure of $0.96458 / share is after MER (as Vanguard would deduct the MER from the income before distributing the tax liability to the client). In VFV’s case, the gross dividend was probably about $0.97593 / share (slightly higher than the after-MER amount disclosed on their site). 15% withholding tax was then paid on this initial amount, or $0.14639 [$0.97593 x 15%].

  36. Ian July 2, 2016 at 8:25 pm #

    Hi Dan,

    I’m a long time Boglehead, and found your website while searching for more resources for Canadian indexers. Thanks for a very informative site!

    I’m Canadian, and investing within a CCPC, and have maxed out my TFSA and RRSP already. My CCPC balance is high relative to the TFSA and RRSP balances, and this will be the case throughout my career.

    My current portfolio is identical to one already mentioned. VCN, VAB, VTI, and VXUS. I’m comfortable with Norbert’s Gambit.

    Is there a significant difference in costs investing with VTI/VXUS versus VXC or XAW within a CCPC?

    CCPC balance would hopefully be at least 2-3 million by retirement.

    I’m intrigued by the greater simplicity of using VXC or XAW instead of VTI/VXUS, but like most Bogleheads, want to keep costs to a minimum.

    Thanks!

    Ian

  37. Scott July 2, 2016 at 8:54 pm #

    Hi Dan, my RRSP is based on your model ETF portfolio, I have about $75k invested so far and do the rebalancing yearly. I definitely want to stick with Canadian dollars, but I’m wondering: at what portfolio size would it make sense to switch to a 5-fund portfolio like Justin’s model? I’m fine with the idea of the more complicated rebalancing, just wondering where the tipping point would be with regards to the extra trading costs. Thanks!

  38. YF July 3, 2016 at 3:32 pm #

    May I suggest that perhaps you could provide two options for the ETF portfolio: one with Canadian dollar ETF only and the other with US dollar ETF for US equity and/or international equity. The latter would be more suitable for people who already have US dollar RSP and are comfortable using Norbert’s gambit.

    Based on the current recommendation, I am wondering what is the equivalent US$ ETF for VXC.

    Thanks.

  39. Canadian Couch Potato July 3, 2016 at 8:05 pm #

    @Ian: US-listed ETFs have lower MERs, of course, but we have many clients with CCPCs and we tend to use Canadian-listed ETFs in these cases. In general, as with personal non-registered accounts, any savings in foreign withholding tax from using US-listed funds is minimal. It is also significantly more difficult to track adjusted cost base with US-listed funds, and there are additional reporting requirements for large holdings of foreign property, which includes US-listed ETFs.

  40. Canadian Couch Potato July 3, 2016 at 8:09 pm #

    @Scott: I think Justin would agree that switching to three funds for foreign equities is probably only worth it if the portfolio if you eventually need to hold these asset classes in different accounts. As long as everything is held in an RRSP any difference is likely to be very small.

  41. Canadian Couch Potato July 3, 2016 at 8:11 pm #

    @YF: There is no single US-listed ETF equivalent to VXC or XAW. You would need to use one fund for US equities (such as VTI or ITOT) and one or two others for overseas stocks (such VXUS, or a combination of IEFA and IEMG).

  42. Steven July 5, 2016 at 2:36 pm #

    Would like to know the details noted that CIBC “apparently offer currency conversion at a very favourable rate”, in case it’s anything like iTrade’s “US Friendly” rate which (for a $30/quarter fee, & only in an RSP), will convert (both buy & sell) at the same rate (i.e. zero spread). A good deal, and more than pays for itself on a single large buy or sell, BUT, not disclosed, is that it only applies to buy & sell transactions. Any USD dividends arriving in the RSP account are still converted at their exorbitant retail spreads. These expensive forced conversions quickly add up to a cost of many hundreds of dollars/year.

  43. Canadian Couch Potato July 6, 2016 at 3:29 pm #

    @Steven: The deal at CIBC seems to be very similar to the US-Friendly offering at iTRADE, but not surprisingly, neither bank is very transparent about what exactly is included and what exactly the spread is.

  44. None July 6, 2016 at 6:03 pm #

    I purchased a block of VXC to account for my international/US component of which you say the true MER is kind of like it being 0.71.

    Would it have been better to have just purchased equal amounts of TDB952 & TDB911 which would have had a combined MER of 0.43? Are there hidden tax issues with those as well?

    Thanks.

  45. Financial Canadian July 8, 2016 at 2:38 pm #

    This is an interesting post and very well done.

    If you extended this logic even further, you could say that once you accumulate enough capital it would make sense to buy the underlying holdings in an ETF rather than buying the ETF itself. Transaction costs would likely make this extremely unattractive, but it’s interesting from a theoretical perspective nonetheless.

    FC

  46. Neil July 8, 2016 at 3:35 pm #

    @CCP, re: no single US-listed ETF equivalent of VXC, does VT not function as a single option? There’d be a slight overweighting of Canada, but that’s true of the VTI + VXUS combo as well.

  47. Canadian Couch Potato July 8, 2016 at 8:13 pm #

    @Neil: Yes, this is true. In an RRSP, using something like VT in place of VXC would be more tax-efficient and the overweighing to Canada would be more or less negligible.

  48. LV July 11, 2016 at 10:39 pm #

    Hi Dan,

    Thanks for another informative article. My RRSP is maxed (government pension contributions + whatever VTI/VXUS I can fit in there). Therefore, I only have space in my TFSA and unregistered accounts left.

    This said, I’ve been investing VXC in my TFSA (as well as VCN, ZRE). Should I consider a different Canadian-listed US/international equities fund to replace VXC in my TFSA?

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