Jason, a reader of this blog, recently wrote to ask why an investor would want to invest in Canadian-listed ETFs that hold US stocks when there are US versions with much lower fees.
For example, the iShares Canadian S&P 500 Index Fund (XSP) charges 0.24%, while the Vanguard Total Stock Market ETF (VTI) has an MER of just 0.09%. Jason had several specific questions—all very good ones—which I’ll attempt to answer.
Q: When one holds a US-based ETF, are the dividends paid out in US dollars and then converted to Canadian dollars by the brokerage, costing the investor conversion fees?
Yes, dividends earned from US-listed ETFs are paid in US dollars. If you hold the ETF in a taxable account, the dividends simply go onto the US-dollar side of the account. But if you hold the ETF in RRSP or other account that does not allow US dollar holdings, your broker automatically converts them before depositing them in your account. This usually incurs a fee of about 1% or more: check your broker’s website or call and ask.
While this conversion fee does cause a small drag on your dividend return,