Archive | Foreign currency

Ask the Spud: When Should I Use US-Listed ETFs?

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,

Continue Reading 125

Norbert’s Gambit: The Complete Guide

[This post was updated in February 2015 to reflect recent changes at some brokerages.]

Norbert’s gambit remains the least expensive way to convert Canadian and US dollars at a discount brokerage. For investors looking to buy US-listed ETFs, learning this technique can save hundreds of dollars by sidestepping the wide currency spreads charged by brokerages.

With the 2013 launch of excellent unhedged foreign equity ETFs from Vanguard and iShares, there’s less of an incentive to use US-listed ETFs than there used to be. In fact, in a non-registered account or a TFSA it may not even be worth the added cost and inconvenience if the only difference is a few basis points of MER. But in an RRSP, there’s a significant benefit: using US-listed ETFs can dramatically reduce the impact of foreign withholding taxes, which can add an additional cost of 0.30% to 0.70% to US and international equity holdings.

The problem with learning to pulling off Norbert’s gambit, however, is that there’s no simple set of instructions that works at every brokerage. RBC Direct Investing and BMO InvestorLine both allow you to hold US dollars in registered accounts,

Continue Reading

Inside the New Vanguard ETFs

Vanguard Canada launched some new ETFs this week, and I spoke with managing director Atul Tiwari about the funds. Let’s take a closer look.

Cross-Canada coverage

The Vanguard FTSE Canada All Cap (VCN) expands on the older Vanguard FTSE Canada (VCE). While VCE holds 78 large-cap stocks, the new index includes 255 holdings and covers 96% of the Canadian equity market. That makes it roughly equivalent to the S&P/TSX Composite Index, which holds 234 companies and claims 95% coverage.

This is about as close as you can get to a total-market index in Canada: dig further and you run into serious liquidity problems with small, thinly traded stocks. “We started out with a very large universe and pared it back to a number we thought would be terrific,” Tiwari explains. “But once you get to the practical aspects it gets pretty tough. Our partners on the capital markets side, who are creating units and doing the market making, have to be comfortable they can find these securities. Obviously there’s a cost associated with that, and at some point it gets too unwieldy and it doesn’t make sense.”

With a management fee of just 0.12% (the MER will be a few basis points higher),

Continue Reading 133

Norbert’s Gambit at CIBC: A Case Study

Norbert’s gambit is an excellent way to reduce the cost of converting Canadian and US dollars, but not every brokerage makes it easy. Recently Justin Bender helped a client of our DIY Investor Service with a large currency conversion inside an RRSP at CIBC Investor’s Edge. It saved the client hundreds of dollars, but it was a complicated transaction and we thought other CIBC investors would benefit from learning the steps.

The difficulty stems from the fact that CIBC does not allow you hold US dollars in registered accounts. Whenever you buy or sell US-denominated securities, the brokerage forces you to convert the currency with the usual spread.

In the example below, the goal was to convert approximately $100,000 CAD to the equivalent in USD, and then use the proceeds to purchase a US-listed ETF. The prices and exchange rates were current at the time Justin made the transactions. For simplicity, we’ve rounded some numbers and ignored the $6.95 trading commission that applied to each trade.

Step 1

When doing Norbert’s gambit, we use the two versions of the Horizons U.S.

Continue Reading 91

The Wait is Over: New ETFs From Vanguard

“Ask and ye shall receive.” That should be the refrain of Couch Potato investors during the last 10 months or so as the industry has filled just about all the gaps in the ETF marketplace.

First it was the flurry of S&P 500 ETFs without currency hedging: Vanguard, BMO, iShares and Horizons have all launched one since October. Then iShares brought out a pair of broadly diversified international equity ETFs, also without the hedging. Now Vanguard Canada has announced a new suite of ETFs that includes a few we’ve been eagerly awaiting.

Vanguard filed the preliminary prospectus for these new ETFs on June 19, and since new products typically appear about 90 days later, at least some should start trading by the end of summer.

First there’s the long-awaited Vanguard U.S. Total Market, an unhedged version of VUS. Its underlying holding will be the US-listed version of this fund, the Vanguard Total Stock Market (VTI), a core piece of my Complete Couch Potato.

While the fees for the new ETFs haven’t been announced,

Continue Reading 49

New BMO Funds Come in Several Flavours

This week BMO announced more additions to its line of ETFs. What’s most interesting about these new funds is not so much the asset classes they track, but the fact that each comes in two or three flavours.

The first group focuses on US dividends. Like the BMO Canadian Dividend ETF (ZDV), the new funds do not track an index: instead they use a rules-based methodology to select 100 companies based on dividend growth rate and payout ratio as well as yield. But here’s the fresh angle: the fund comes in three versions: one uses currency hedging (ZUD), while the others are non-hedged and trade in your choice of Canadian (ZDY) or US dollars (ZDY.U).

A second trio of ETFs is devoted to mid-term US investment-grade corporate bonds, which have maturities ranging from five to 10 years: that contrasts with the iShares U.S. IG Corporate Bond (XIG), which has an average maturity of about 12 years. Again, the fund is available with currency hedging (ZMU) and in non-hedged Canadian (ZIC) and US-dollar (ZIC.U) versions.

Continue Reading 22

Ask the Spud: The US-Dollar Couch Potato

We just sold our condo in Florida and now have some money to invest in non-registered accounts. The problem is, the money is all in American dollars. Is there a way to use the Couch Potato strategy using only USD? – John D.

It’s certainly possible to build a fully diversified ETF portfolio using only US dollars, but there are a number of important issues to consider.

The first is whether you really need to keep the money in USD. If you don’t plan to make another major purchase in the United States (or if you earn a lot of USD income but all your expenses are in Canadian dollars) it might make sense to exchange most or all the money into your home currency before investing it. Of course, you will need to find a low-cost method for doing this, such as Norbert’s gambit.

You also need to consider your overall asset location. Holding fixed income, Canadian equities, and foreign equities in a non-registered USD account probably isn’t the most tax-efficient strategy. Even if your registered accounts are maxed out, you can still make changes so your fixed income stays in Canadian dollars in RRSPs and TFSAs,

Continue Reading 18

Calculating Foreign Returns in Canadian Dollars

Global diversification was a huge benefit to investors in 2012, as Canadian equities lagged well behind the rest of the world. Two core funds in the Complete Couch Potato are the Vanguard Total Stock Market (VTI) and the Vanguard Total International Stock (VXUS), and last year these funds delivered returns of 16.40% and 18.22% respectively.

But these figures are misleading, because they’re expressed in US dollars. A Canadian investor is likely to be more concerned about how their US-listed ETFs performed in terms of our own currency. And that information isn’t easily available, so you need to do the math yourself. It’s a two-step process:

1. Determine the annual change in the exchange rate. Your first step is to learn how much the value of $1 USD changed over the year. That means looking up the exchange rates on December 31 of both 2011 and 2012. There are several sources for these data, but I’ve used XE.com. If you use another (such as the Bank of Canada or OANDA) you’re sure to get slightly different numbers: there are noon rates, closing rates,

Continue Reading 24

How Much Are You Paying For US Dollars?

Currency conversion remains one of the biggest rip-offs in banking and investing. It’s made worse by the lack of transparency: if you call your discount brokerage they’ll quote their current rates, but it’s still hard to calculate the actual cost of your transaction. Don’t expect your brokerage to help with the math.

The first key point is, in practical terms, there isn’t a single exchange rate. While we might say “the US and Canadian dollars are at par,” that’s never quite true. On a day when the two currencies are theoretically equivalent, it might cost you $1.01 CAD to buy $1 USD, and if you sell $1 USD you might receive $0.99 CAD. That’s because currencies have a bid-ask spread just like stocks and ETFs that trade on an exchange.

There’s a simple formula to calculate the size of the bid-ask spread in percentage terms:

= (Ask Price – Bid Price) ÷ Ask Price × 100

Note that the bid price is always the lowest of the two rates you’re quoted. So if we plug in the numbers in the example above, the math works like this:

= (1.01 – 0.99) ÷ 1.01 × 100
= (0.02) ÷ 1.01 × 100
= 0.0198 × 100
= 1.98%

The bid-ask spread in this example works out to 1.98%,

Continue Reading 53