Your Complete Guide to Index Investing with Dan Bortolotti

The True Cost of Foreign Withholding Taxes

2017-12-02T23:29:50+00:00February 20th, 2014|Categories: ETFs, Index funds, Research, Taxes|Tags: |145 Comments

Back in the fall of 2012, I wrote a pair of blog posts about the impact of foreign withholding taxes in US and international equity funds. The first explained the general idea of this tax on foreign dividends, while the second showed which funds are best held in which types of account (RRSP, TFSA, non-registered). This is a complicated and confusing topic, so I was surprised at the enormous interest these articles generated from readers, the media, advisors and even the ETF providers themselves.

What was missing from those articles, however, was hard numbers: it’s one thing to say this fund is more tax-efficient than that one, but by how much? To my knowledge no one has ever quantified the costs of foreign withholding tax in a comprehensive way—until now. Justin Bender and I have done this in our new white paper, Foreign Withholding Taxes: How to estimate the hidden tax drag on US and international equity index funds and ETFs.

The factors that matter

The amount of foreign withholding tax payable depends on two important factors. The first is the structure of the ETF or mutual fund. Canadian index investors can get exposure to US and international stocks in three ways:

  • through a US-listed ETF
  • through a Canadian-listed ETF that holds a US-listed ETF
  • through a Canadian-listed ETF or mutual fund that holds the stocks directly

The second key factor is the type of account: RRSPs, personal taxable accounts, corporate accounts, TFSAs and RESPs are vulnerable to foreign withholding taxes in different ways. Their impact in corporate accounts, in particular, was little understood until Justin delved deeply into this matter with the expert help of Charles Berry, an accountant at Welch LLP.

We examine eight different fund structures in the paper, and for each one we estimate the total cost of a representative fund by adding the fund’s management fees to the foreign withholding taxes that apply in each account type. We’ll forgive you if you want to skip all the formulas and cut to the chase, and we’ve presented our estimates for many popular ETFs in a table at the end of the paper. Here’s a small sample:

US Equities Market RRSP TFSA Taxable
Vanguard Total Stock Market (VTI) US 0.05% 0.32% 0.05%
Vanguard US Total Market (VUN) CDN 0.44% 0.44% 0.17%
TD US Index – e-Series (TDB902) 0.65% 0.65% 0.35%
Developed Markets Equities Market RRSP TFSA Taxable
Vanguard FTSE Developed Markets (VEA) US 0.31% 0.68% 0.31%
Vanguard FTSE Developed ex N. America (VDU) CDN 0.90% 0.90% 0.53%
BMO MSCI EAFE (ZEA) CDN 0.67% 0.67% 0.34%
iShares MSCI EAFE IMI (XEF) CDN 0.94% 0.94% 0.56%
TD Int’l Index Fund – e-Series (TDB911) 0.84% 0.84% 0.51%
Emerging Markets Equities Market RRSP TFSA Taxable
Vanguard FTSE Emerging Markets (VWO) US 0.49% 0.85% 0.49%
Vanguard FTSE Emerging Markets (VEE) CDN 1.05% 1.05% 0.69%
iShares MSCI Emerging Markets IMI (XEC) CDN 1.00% 1.00% 0.68%

The first thing that jumps out is the large difference between US-listed and Canadian-listed ETFs when held in RRSPs. A fund like VUN is 39 basis points more expensive than VTI, while VDU adds an additional 59 basis points compared with VEA. In a large RRSP, therefore, it may be significantly more cost-effective to hold US-listed ETFs for your foreign equity exposure.

However—and this is important—this is only true if you can avoid the high cost of converting currency. If you’re investing relatively large sums and you’re comfortable doing Norbert’s gambit, then US-listed ETFs are an excellent option. But not everyone is keen to do this: in fact, after we explain the trade-off to clients of our DIY service, many decide they’re happy to pay more for the convenience of trading only Canadian-listed ETFs. And there’s nothing wrong with that decision.

Another important takeaway is that the tax advantages of US-listed equity ETFs are much smaller (or non-existent) in non-registered accounts. It probably makes sense for DIY investors to use Canadian-listed ETFs in their taxable accounts—even though their MERs are slightly higher—to avoid the cost of currency conversion.

Keep it in perspective

One of the common reactions to my earlier articles about foreign withholding taxes was to overestimate their significance. Let’s remember foreign equities are typically about 30% to 40% of a balanced portfolio, and the withholding taxes apply only to the dividends, which are likely to be in neighbourhood of 2% to 4%. So their impact on the overall portfolio may not be as large as you think.

Here’s an example of the cost breakdown in two versions of the Complete Couch Potato: the first uses US-listed ETFs for the foreign equities, while the second uses their Canadian-listed equivalents:

With US-listed ETFs % RRSP TFSA Taxable
Vanguard FTSE Canadian All Cap (VCN) 20% 0.14% 0.14% 0.14%
Vanguard Total Stock Market (VTI) 15% 0.05% 0.32% 0.05%
Vanguard FTSE Developed Markets (VEA)  10% 0.31% 0.68% 0.31%
Vanguard FTSE Emerging Markets (VWO)  5% 0.49% 0.85% 0.49%
BMO Equal Weight REITs (ZRE) 10% 0.62% 0.62% 0.62%
iShares DEX Real Return Bond (XRB) 10% 0.39% 0.39% 0.39%
Vanguard Canadian Aggregate Bond (VAB) 30% 0.22% 0.22% 0.22%
Total cost 0.26% 0.35% 0.26%
With Canadian-listed ETFs % RRSP TFSA Taxable
Vanguard FTSE Canadian All Cap (VCN) 20% 0.14% 0.14% 0.14%
Vanguard US Total Market (VUN) 15% 0.44% 0.44% 0.17%
Vanguard FTSE Developed ex N. America (VDU) 10% 0.90% 0.90% 0.53%
Vanguard FTSE Emerging Markets (VEE) 5% 1.05% 1.05% 0.69%
BMO Equal Weight REITs (ZRE) 10% 0.62% 0.62% 0.62%
iShares DEX Real Return Bond (XRB) 10% 0.39% 0.39% 0.39%
Vanguard Canadian Aggregate Bond (VAB) 30% 0.22% 0.22% 0.22%
Total cost 0.40% 0.40% 0.31%

I would argue that in a TFSA or taxable account the difference is trivial, and Canadian-listed ETFs are almost certainly the better choice. Even in an RRSP, the total difference of 14 basis points is not likely to outweigh the cost of currency conversion in smaller accounts.

In the end, it’s up to you to decide whether it’s worth using US-listed ETFs for your foreign equity holdings. But least now you have the numbers to help you make that choice.


  1. Willy February 23, 2014 at 1:20 pm

    I actually did not realize that MERs on ETFs in taxable accounts were deductible. Could anyone share details or a link to a site with further explanations on what the CRA will accept on this? What value of MER is used (as it and your holding size might fluctuate throughout the year)? Is it included in the cost base of the ETF, or do you write it off as a yearly expense like investment loan interest?

  2. Jas February 23, 2014 at 1:33 pm

    @CCP and Justin Bender:
    Thanks for the answer. Once you include the tax deduction from the total MER (ER), the difference between Canadian listed ETFs and US-listed ETFs is quite small inside taxable accounts.

    Inside taxable accounts, another advantage of “real Canadian ETFs”, that hold underlying stocks directly (ex ZEA and ZSP), rather than simply holding a US-listed ETF, is that capital gains distribution should be passed along to unitholders as capital gains instead of foreign income, which is the case with US-listed ETFs. Only 50% of capital gain distributions are included in taxable income, vs 100% for foreign income/foreign dividends.

  3. Canadian Couch Potato February 23, 2014 at 1:33 pm

    @Willy: You don’t need to make any kind of claim. Think of it like this: if a bond ETF collects 3% in interest payments and has an MER of 0.25% it would distribute 2.75% to you and keep the other 0.25% for itself. Therefore you only pay tax on the 2.75%. If the fund instead passed along the whole 3% coupon and then took its management fee out of the fund’s capital gains, your after-tax return would be lower. The Steadyhand article Jas linked to provides a good explanation. (Management fees are normally deducted monthly: details for each fund are in the prospectus.)

    @Jas: True in theory, though in practice I think you will find US-listed equity ETFs from Vanguard and iShares very rarely distribute capital gains. None of the funds mentioned in the white paper did so in 2013.

  4. Willy February 23, 2014 at 2:38 pm

    Right, that was stated and pretty obvious. Guess I was reading too fast. :)

  5. Francis February 23, 2014 at 9:54 pm

    @CPP “First, the amount of income tax payable would depend on the individual investor’s circumstances”

    So the tax credit that you put in consideration for non-registred account.

  6. Dave February 24, 2014 at 10:11 am

    I hold some US based ETF’s, but I have recently started purchasing their Canadian equivalents. I intend on just holding onto the US ETF’s I bought, for the long term.

    Do I have to fill out a W8BEN form? I read about this form some time ago in Moneysense magazine. I called TD Waterhouse at the time and the agent had no idea what I was talking about. We finally found the form online and I printed out a copy. But the agent really had no idea if I should fill it out or who I should submit it to.

    As far as I understand, filling out the W8BEN will declare that I am a resident of Canada and as such I wont have to pay as much US tax.

    I also don’t know if I would have to fill out one of these forms for each account that I have within Waterhouse.

    Any guidance would be appreciated.

  7. Canadian Couch Potato February 24, 2014 at 10:23 am

    @Dave: If you hold US ETFs you should definitely fill out a W8BEN with your brokerage. If you call and they don’t know what you mean, ask to speak to someone else. :) This will ensure any withholding taxes are levied at 15% rather than 30%. You should not have to fill out one for each individual account: one per person is enough.

  8. Norman February 24, 2014 at 12:02 pm

    Above you mention:
    If you’re investing relatively large sums and you’re comfortable doing Norbert’s gambit, then US-listed ETFs are an excellent option.

    What is considered ‘relatively large’ enough to hold the US ETFs instead of Canadian ETFs. In other words, is there is point (such as $10000) where it makes sense to hold US ETFs?
    I would imagine over time, the extra MERs and withholding taxes from holding Canadian ETFs will add up, wouldn’t it?

  9. Tim February 24, 2014 at 2:12 pm

    I have a child with a disability and we have opened an Registered Disability Savings Plan for him. I have yet to purchase any ETFs for it but plan to do so in the future. Your white paper does not address this type of account, no doubt because not too many people have one. How is foreign withholding tax treated in a RDSP?

  10. Canadian Couch Potato February 24, 2014 at 3:37 pm

    @Norman: There’s no magic number: it really comes down to what you’re comfortable with. But I would estimate that your US/international equity holdings would need to be at least $50,000 or so before US-listed ETFs were really worth considering. Indeed, we have DIY clients who have opted to use Canadian-listed ETFs even with six-figure RRSPs simply because they had no desire to do Norbert’s gambit on their own.

    @Tim: An RDSP would get similar treatment to a TFSA or an RESP. None of these accounts qualify for the exemption on US withholding taxes because they are not considered retirement accounts.

  11. Oldie February 24, 2014 at 5:48 pm

    @CCP: OK, I just heard about W8BEN for the first time; I have held VXUS for a year now without filling out a W8BEN. I guess that means I have already been dinged 30% FWT for all last year’s dividend distributions. I’ll fill out the form now for future distributions, but is there any way to reduce the tax retroactively, i.e. get 15% back from the US IRS?

  12. Canadian Couch Potato February 24, 2014 at 8:02 pm

    @Oldie: I have never tried, but I seriously doubt it.

  13. Harrison February 24, 2014 at 9:07 pm

    @CCP would you be able to update this post: to include Canadian listed ETFs?

  14. john gibbons February 24, 2014 at 9:11 pm

    Another option not listed for US and Intl. exposure are Vanguard’s LSE listed ETF’s. These were created, in part, to get around the heavy wht issue:
    VUSD – S&P 500
    VWRD – All world
    VDEM – EM
    VDJP – Japan
    VDPX – Asia ex Japan
    VHYD – All world high dividend

  15. Canadian Couch Potato February 24, 2014 at 10:38 pm

    @Harrison: Whether the ETF is listed in Canada or the US would not change the basic asset location principles in that article. Remember, income tax is almost always going to be a bigger factor than foreign withholding tax.

    @john gibbons: Very few Canadian brokerages allow you to buy ETFs on the London exchange, and even if they do the cost would likely far exceed any tax benefit.

  16. Joe February 25, 2014 at 12:21 pm

    Is the W8BEN form required for all accounts or just non registered and possibly TFSA?

  17. Canadian Couch Potato February 25, 2014 at 1:01 pm

    @Joe: The W8BEN should be filed for each person, not each account. However, if you have accounts at multiple brokerages you must fill one out at each institution.

  18. Jas February 25, 2014 at 1:25 pm

    I was told by TDwaterhouse that I did not have to fill out a W8BEN since I already provided a proof of residence when I created my tdwaterhouse account. It seems that you only need to use the W8BEN if somebody forgot to ask you your proof of residence when you created your account. You can also check on your investment income summary report in your tdw account how much withholding tax you paid on your US investments (15 vs 30%)

  19. Oldie February 25, 2014 at 1:40 pm

    @Jas: Thanks! Struggling here with unexpected new information.

  20. Joe February 25, 2014 at 2:22 pm

    Sorry to clarify. If you only hold RRSP’s and buy US etf’s do you need to fill out the W8BEN form?

  21. Canadian Couch Potato February 25, 2014 at 2:40 pm

    @Joe: It may not be necessary, but I would still want to have one on file with the brokerage. I’m a bit surprised that TD told Jas it was only necessary if someone forgot to ask you for proof of residence. It’s not usually possible to open a brokerage account without providing this proof. Normally you need to supply a driver’s license or passport or other government ID.

  22. Jas February 25, 2014 at 2:48 pm

    In that case, to be safe I will also fill the W-8BEN form provided on TDW’s website:

    But it is surprising that the information we get from TDW is so unreliable.

  23. Tristan February 25, 2014 at 5:35 pm

    @Jas: I’m with TD. I had never heard of a W8BEN form. Only 15% of my US dividends have been withheld, so maybe some of the brokerages do this for you, but worth checking anyway.

  24. Stephen February 25, 2014 at 6:43 pm

    So I just opened ( Feb 22, 2014) a RBC Direct Investing TFSA account.
    They (RBC Bank) asked if I was Canadian. They did not say anything about a W8BEN.

    My question is I would like to buy (VUN) and hold it in my Direct Investing TFSA. So do you think I would also be required to fill out a W8BEN?

    My other question is it better to hold 10,000 (VUN) in my TFSA and have to pay the US withholding TAX of 15% or is it better to hold 10,000 (VUN) in a regular non-registered account and claim the foreign Tax credit? If there is such a thing?

    I thought the only tax credit we get in Canada was the Canadian divided tax credit.
    Do we also get a foreign tax credit on investments In (VUN) ?

    I realize that holding (VUN) in an RRSP is better as far a taxes go, but I may need the money in the next 3-5 years.

    Not sure if I should be investing in (VUN) or just put it all in (XIC/XIU)

    Thank you
    First time investor

  25. Oldie February 25, 2014 at 7:27 pm

    @Jas and @CCP: I just checked the T5 form issued by my brokerage. Doing the calculations, the foreign with-holding tax on my VXUS etf works out to exactly 15%. So the infamous W8BEN form (or an equivalent) had been appropriately filled in all along. For all I know, it might have been me — I know at the time of set-up of the account and at times since then, I have been asked to fill out and sign all kinds of identifying, attestation and disclosure forms. I would not have been able to recall all or any of the forms. I guess the bottom line is that my brokerage had been on the ball all along. Great relief.

  26. Vincent February 26, 2014 at 12:29 am

    @Norman and @CCP

    TD Waterhouse now offers a ‘free, automatic U.S. Dollar Money Market Sweep & Redemption’ service:

    Quoting from that page:
    If you’re trading U.S.-dollar investments in a Registered Plan account, including a Tax-Free Savings Account (TFSA), we offer a convenient way to avoid foreign exchange conversions each time you buy or sell. Simply take advantage of our free, automatic U.S. Dollar Money Market Sweep & Redemption Service! With a one-time phone call, you can enroll in this service which will automatically:

    – Sweep the proceeds from the sale of U.S. securities in your Registered Plan account into the TD U.S. Money Market Fund (Symbol: TDB 166)
    – Redeem sufficient units of the TD U.S. Money Market Fund that you hold to settle the purchase of U.S. securities in your Registered Plan account

    My understanding of this is that they do the Norbert’s gambit for you.

    Sounds almost too good to be true.

    Is somebody using this service?

  27. Canadian Couch Potato February 26, 2014 at 12:49 am

    @Vincent: This is a useful service, but it’s not the same as Norbert’s gambit. If you already hold USD-denominated securities, this service can help you avoid forced conversion to CAD when you sell. But it will not help you convert CAD to USD.

  28. Canadian Couch Potato February 26, 2014 at 12:56 am

    @Stephen: The W8BEN is required only for US securities and VUN is a Canadian ETF. Your other questions suggest your are letting taxes drive your investment decisions: the decision between VUN and XIC/XIU should be based on whether you want exposure to US or Canadian stocks, not concerns about taxes. And if you may need the money in 3-5 years it should not be invested in stocks at all.

    For more on the foreign tax credit see these links:

  29. Stephen February 26, 2014 at 9:33 am

    “If I need the money in 3-5 years you should not be investing in stocks at all”

    I would just like to clarify your previous advice. I have some money set aside for a
    down payment for a house. It was in a no feesavings account making 1.35% interest.

    I wanted to try the couch potato aproch.

    The plan:

    RRSP 27,000 Mutual fund (long term investment), bi-weekly contributions.
    My TFSA 22,000
    10,000 (VCN)
    10,000 (CDZ)
    2,000 (mutual Fund) monthly contributions

    Wife’s TFSA 25,000
    10,000 (XIU)
    10,000 (XDV)
    5,000 (Mutual Fund) monthly contributions.

    I have a government pension (Paramedic) so I have not been
    saving as much in RRSPs.

    Also have investments in two rental properties so not interested in REITs.
    I hear bonds are not a good investment as interest rtes might be going up, so I have not
    Included them.

    Wife’s TFSA and mutual fund are more long term, but still has to be liquid.
    My TFSA and Mutual fund would be used for a down payment on a house. We currently rent for 1,200/month.

    Fist time investing and not sure if this is a good approach. But not investing at all in stock? Is there no confidence that in 3-5 this allocation of ETFs will generate a return?

  30. Steve February 26, 2014 at 9:53 am


    Had to jump in here …

    “I have some money set aside for a down payment for a house. It was in a no feesavings account making 1.35% interest.”

    If you require that money to buy a house, that “high interest” savings account is exactly where the money should stay (although a GIC with a term = when you need the money for the house might also be appropriate).

    “The plan: …”

    I have no clue reading that what your asset allocation is – do you have a plan?

    “I hear bonds are not a good investment as interest rtes might be going up, so I have not
    Included them.”

    Seyz who? No one knows what interest rates will do. Bonds are an excellent investment if your asset allocation calls for their inclusion. What is your asset allocation plan?

    “But not investing at all in stock? Is there no confidence that in 3-5 this allocation of ETFs will generate a return?”

    The issue is the very real possibility that over 3-5 years your stock ETFs could generate a significant NEGATIVE return … what happens to your house down payment then if much of the money is gone?

  31. Canadian Couch Potato February 26, 2014 at 10:31 am

    @Stephen:I would echo much of what Steve wrote. Stocks have lost money over three- and five-year periods many times in the past, and will no doubt do so again in the future. These articles may be of help:

  32. Oldie February 26, 2014 at 11:17 am

    @Stephen: You appear to be a little confused by this advice, but there is really no contradiction here. As a Newbie, I also used to be so f0cussed on the information given here on the huge benefits of diversification and asset allocation that I, too, initially failed to appreciate that the relative safety of this strategy only kicked in for durations over about 15 years. Don’t believe predictions about the unpredictable. Bottom line — if you know for sure you will be spending the money in 3 years, you want a 100% sure thing, not a gamble that might end up as a loss, so put all the money in a 3 year GIC. If there’s a possibility that a purchase opportunity may suddenly come up for which you would need the cash sooner, then put it all in a high interest savings account.

  33. Oldie February 26, 2014 at 11:40 am

    @ Stephen btw “…in a no feesavings account making 1.35% interest.” Your friendly big bank may be convenient, but there are significantly higher yielding and still safe HISA and GIC opportunities including TFSA savings deals easily available elsewhere through a quick internet search.

  34. Stephen February 26, 2014 at 1:27 pm

    Thanks for all the advice. I was getting focused on investing in ETFs in my TFSA.
    I looked at (XIU)ETF on Morning Star and noticed that the only negative returns
    where 2008 and 2011. Looking at the performance of a 10,000 investment in (XIU) it looks like, since 2004, XIU had steadily been in the positive except for 2008 and 2011.

    I’m hearing the advice of GICs, and high interest savings accounts over the short term.

    Since I’m new to investing I value all this good advice. I’m I reading the performance report for XIU incorrectly ?

  35. Oldie February 26, 2014 at 3:08 pm

    @Stephen: It appears you accept the collective wisdom of the knowledgable passive index investors here, which is a good thing, but merely seek understanding of why tracking past performance is not useful in predicting the near and intermediate future. My experience has been that methodically reading past posts (the site search tool is really useful) and continuing to follow this blog would eventually give anyone the understanding you seek. This side-discussion has deviated from the topic of the day, so for starters I would suggest

  36. Steve February 26, 2014 at 5:01 pm


    “I was getting focused on investing in ETFs in my TFSA.”

    You wouldn’t buy an expensive new power tool at the hardware store because it was the latest, shiniest thing, then wander around your place wondering what you can use it for, would you? Instead, you’d see a job needing doing, then plan how to do it, then select the most appropriate tool for that job (and try to find the tool at the cheapest price possible) … Need –> Plan –> Tools

    Investing is a bit like that – ETFs are the latest, shiniest investing thing , but really they are only tools, means to meet an (investing) need, just like GICs or savings accounts or mutual funds or whatever. Don’t fetishize them.

    You’ve identified your need as saving for a house down payment. Your plan should involve ensuring you have that money available when you want it for a house in 3-5 years. The appropriate tools in that case are those that guarantee the safety of the money while earning the best return possible – in this case, a savings account or maybe a GIC with a comparable term (if you are certain you won’t need a house down payment before GIC maturity).

    If your need is to fund your retirement in 25+ years, then the plan and the tools will of course be different.

    “I’m I reading the performance report for XIU incorrectly ?”

    The point is that the XIU performance report is utterly and completely meaningless for you. How do you know the future will look like the period since 2004? What if the future is like 1990-94, when the TSX was down 3 years out of 5? Or like the great post-Nortel meltdown of 2001-2, when it was well down both years in a row? Even in 2008 the TSX lost 1/3 of its value – what if that happened just before you needed your money? Could you still afford a house if you suddenly lost 1/3 of your down payment savings?

    You don’t know what will happen, and no one does. No one can predict the future. That is why if you **know** you need the money in 3-5 years, then you invest that money in a tool like a savings account or GIC where you **know** it will all be there (plus a bit more earned) when you need it.

  37. Cus February 28, 2014 at 1:54 am

    Stephen, also be sure that where you intend to buy, owning is a better investment than renting. There are numerous calculators to help with this. Also, hopefully you are aware that you can withdraw 25k from the rrsp for a house provided you pay it back over the next 15 years. Depending on how much down payment you need, this will likely leave more money in the TFSAs, which are more flexible and funds are easier to access if necessary.

  38. Ross March 3, 2014 at 1:40 pm

    Dan, question re VDU re ZEA. I’m struggling to understand merit of VDU in your last table. If I understand rightly then ZEA has advantages in direct ownership of securities so avoiding a portion of withholding taxes. Great :) In the upper table in article then you include both VDU and ZEA but in lower table “Canadian ETFs” then VDU is included.

    If I understand rightly then ZEA offers lower MER, relative to VDU, across all account types.

    Latter tables appear to show relative merits of US vs Canadian ETFs. The analysis highlights significant difference in MER, subject to account size, in VEA (US) vs VDU (Cdn) … but ZEA (in substitution for VDU) appears to offer near-identical MER to VEA in TFSA and taxable accounts.

    Likely I miss something but I do not understand seeming preference for VDU in regards Cdn-listed Int’l equites.

  39. Canadian Couch Potato March 3, 2014 at 3:12 pm

    @Ross: Your understanding is correct. The reason I used VDU in the example above is simply because it is the Canadian equivalent of VEA, and therefore the comparison is as fair as possible. VEA and ZEA track different indexes and have different underlying holdings, even though they are in the same asset class and would be reasonable substitutes for one another.

  40. Gregg Andrews March 3, 2014 at 5:32 pm

    Something that I think ought to have been added into the article is whether some folks might want and need USD in future due to travel plans and wintering plans in retirement where USD is the king currency. Another example is those living close to border like Niagara or Windsor who chose to fly out of US airports and save $$$$$. That way conversions are not going on – you simply use your USD income stream to pay for things priced in USD. All you need is a USD credit card – and that is already a smart move for anyone doing any much volume of USD transactions.

    Then some of us work in the US at least some of the time and have US income. So keeping some of that income in USD for investing and future usage saves on conversion back & forth also. And it then gives a little different perspective to the article’s analysis which seems to assume the Canadian investor is not really dealing much in USD if at all.

  41. Ross March 3, 2014 at 7:18 pm

    Thanks Dan. You’re quite right, unsurprisingly! I looked at the index descriptions of VDU and ZEA and they seemed near-identical but the holdings were more different than I expected.

    I presume that the difference relates to market-capitalization based weightings (VDU) vs otherwise (ZEA) … a topic for another time … but that you neatly captured in prior articles, such as

    For anyone curious, data is below (from respective websites).

    Index descriptions … rather similar:
    Vanguard: “The FTSE Developed ex North America Index is a market-capitalization-weighted index representing the performance of large- and mid-capitalization stocks in developed markets, excluding the U.S. and Canada.”
    BMO: “MSCI EAFE Index is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada.”

    Top 3 holdings … quite different:
    Geography – Vanguard (21.0% Japan, 20.5% UK, 8.9% France, …) vs BMO (26.2% UK, 21.1% Japan, 8.3% Germany)
    Sector – Vanguard (24.4% Financials, 17.7% Consumer, 14.3% Industrial) vs BMO (25.6% Financial, 12.8% Industrial, 11.9% Consumer)

  42. Steve March 3, 2014 at 7:55 pm


    “I presume that the difference relates to market-capitalization based weightings (VDU) vs otherwise (ZEA)”

    No, both ETFs track (different) Market Cap based indexes. The difference in holdings is primarily due to different free float requirements for inclusion in the index, and that the FTSE index used by the Vanguard fund includes South Korea (at almost 5% of the index total), while the MSCI index used by BMO does not (MSCI still includes South Korea as an “emerging market”)

  43. Canadian Couch Potato March 3, 2014 at 8:17 pm

    @Gregg: I agree it is often convenient to keep US cash on hand for vacations and other activities, but this money should not be invested in equity or bond ETFs. The article applies only to long-term investors who have no immediate need for the cash.

  44. Gregg Andrews March 3, 2014 at 9:42 pm

    I think my point was missed. I have been investing in US ETF and stocks for sometime. I do see a long time horizon (although retirement is now closer). I can adjust mix of the investments, plus I will receive income from the investments in USD as well (because of course I have USD investment account). I have plenty of USD cash and near cash. So no worries.
    I am just saying that I have long term need for USD due to our high interest in travel and our very low interest in living in Canadian winters.

  45. Victor March 4, 2014 at 3:36 pm

    So VTI trades on NYSE in USD, managed by Vanguard USA . VUN trades in CAD on TSX, is managed by Vanguard Canada, but internally just holds VTI.

    There is a tax advantage to hold VTI directly in an RRSP.

    What about an ETF like ZLU, which trades on the TSX in CAD, but also in USD under ticker ZLU.U?
    Are these two separate funds or same fund?
    Is there any tax advantage in holding one versus the other?

  46. Canadian Couch Potato March 4, 2014 at 4:10 pm

    @Victor: The relevant factor is where the fund is domiciled, so all Canadian-listed ETFs are treated the same, regardless of their trading currency. ZLU.U would have the same tax treatment as ZLU (in the white paper we refer to these as Type B funds).

  47. Kiyo March 19, 2014 at 1:34 pm

    Can you say a quick word or two about SWAP structured ETFs, like HXS?

  48. Canadian Couch Potato March 19, 2014 at 1:44 pm

    @Kiyo: No foreign withholding taxes would be payable with a swap structure like HXS. However, this ETF has a 0.30% swap fee (in addition to the MER), which is identical to the 15% withholding tax on a 2% yield, so there’s no free lunch. And, of course, you can recover the withholding tax, but not the swap fee. (HXS may still have an overall advantage if you can defer taxes on dividend income and pay them the capital gains rate.)

  49. Ryan March 20, 2014 at 2:33 pm


    Thank you for sharing this information with us.

    I have a question regarding ZEA, which you’ve described as a Type F fund. Since ZEA is 49.28% allocated to EFA, should it be considered a Type E/F hybrid for the purposes of calculating FWT? If so, how should it be calculated, and is it already factored into the figures posted above?

    Thanks again for providing a much-needed resource for emerging investors.


  50. Canadian Couch Potato March 20, 2014 at 2:42 pm

    @Ryan: That big holding in the iShares ETF is temporary. The fund uses that ETF when it gets a large inflow of cash, but you will see it fall dramatically as they eventually buy up the underlying stocks.

Leave A Comment