Archive | Foreign currency

Will the Real S&P 500 Please Stand Up?

I received an email recently from Scott, a reader with a great question about index funds and ETFs that track the S&P 500. He agreed to let me share his letter and my response.

“I’ve been using index funds for some time now, but have been giving ETFs more thought. Specifically, I’m interested in switching my TD U.S. Index Fund (e-Series) to a U.S.-listed ETF such as the SPDR S&P 500 (SPY). Before I proceed though, I’d like to know why the TD fund has lagged behind SPY in terms of return? I was told in a forum that it may be due to the currency in which I am purchasing the funds. TD e-Series funds require me to use Canadian dollars. However, buying SPY would require me to use U.S. dollars. Do you have any insight about why there is much of a difference between the two?”

First, it’s important to note that there are actually three e-Series funds that track the S&P 500, and they all have very different characteristics:

Scott owns the TD U.S. Index (TDB902) fund, which is bought and sold in Canadian dollars,

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Should You Buy US-listed ETFs?

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,

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