Author Topic: US exposure for a Cdn investor - VOO vs VFV  (Read 1049 times)

Dee

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US exposure for a Cdn investor - VOO vs VFV
« on: September 17, 2013, 06:14:48 PM »
I've been wanting to add some US stocks to my portfolio, within my RRSp. I was leaning towards a Vanguard ETF that tracks the S&P 500. Then I came across this articles from the Globe and Mail:  U.S. ETFs: Top picks for Canadian investors (http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/us-etfs-top-picks-for-canadian-investors/article6115956/).

The article compares Vanguard S&P 500 ETF (VFV) to  NYSE-listed version of the Vanguard S&P 500 Index ETF (VOO):

"Why not buy VOO at 0.05 per cent instead of VFV at 0.17 per cent? In fact, thereís a tax-related argument for doing just that, if youíre investing in a registered retirement account. According to Vanguard, $1 in dividends paid by VOO would turn up in retirement accounts as $1. You can thank a Canada-U.S. tax treaty for that.

The same courtesy does not apply to VFV in registered accounts, though. Itís structured in such a way that the U.S. withholding tax eats 15 cents of every $1 paid in dividends, and thereís no way for investors to recover that money. In non-registered accounts, VOO and VFV are all treated equally. Investors lose 15 cents of every $1 in dividends to withholding taxes, but they can claim credit for this amount when filing their income tax returns.

The big reason to consider VFV over VOO has to do with currency conversion. If you were to buy VOO, your brokerís markup on the conversion of Canadian dollars into American could range from 0.5 to 1.85 per cent. When you buy VFV instead of VOO, you can regard the extra 0.12 of a percentage point in fees as the cost of currency conversion and various portfolio management functions."

My difficulty is that I'm not sure I've really understood the implications of the above. Can anyone shed any further light? Or share what they've decided to hold in their own portfolios and why?

I was planning on holding my US stocks or stock indexes in my RRSP (as opposed to TFSA or unregistered) because of the tax treatment of dividends within RRSPs but this is making me re-consider. I'm just now sure what the better move is... though having US exposure seems like a good idea...

Jimbo

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Re: US exposure for a Cdn investor - VOO vs VFV
« Reply #1 on: September 17, 2013, 07:05:44 PM »
US exposure will suck outside of the RRSP - 15% withholding tax no matter what. You have to pick the less of two evils.

Mega

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Re: US exposure for a Cdn investor - VOO vs VFV
« Reply #2 on: September 18, 2013, 05:47:23 PM »
If you want USA equities, hold them in the RRSP.

In a TFSA the US government still taxes you and you get no credit.
In unregistered accounts the US government taxes you, but you get credit.

Realistically holding US equities depends on your broker. Do they keep us and cdn dollars separate? If so, you don't need to worry about fx fees.

daverobev

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Re: US exposure for a Cdn investor - VOO vs VFV
« Reply #3 on: September 18, 2013, 06:01:42 PM »
Look up Norbert's Gambit, it is a cheap way of converting CAD to USD.

I think the article is missing the point though I'm only scanning it.

For TSX-listed funds, you will a) pay more (marginal) and b) lose the withholding. ZSP and VFV are in CAD/listed on the TSX. They are just a wrapper for a US-listed fund. But the wrapper means you lose the withholding.

Hopefully this will clear it all up: http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/

daverobev

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Re: US exposure for a Cdn investor - VOO vs VFV
« Reply #4 on: September 18, 2013, 06:03:37 PM »
"The answer" is that you do Norbert's Gambit, which saves you the forex fee, and buy VOO directly in an RRSP. That is optimal.

sleepyguy

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Re: US exposure for a Cdn investor - VOO vs VFV
« Reply #5 on: September 21, 2013, 11:16:51 AM »
Yup, keep US holdings is RRSP, balance it out with lots of Canadian equity in non-reg or TSFA.  Personally if you're young, I don't think Bonds should be too much in the equation... maybe 15-20% but that's just me.
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Dee

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Re: US exposure for a Cdn investor - VOO vs VFV
« Reply #6 on: September 22, 2013, 02:02:03 PM »
Thanks a bunch, Mustachians, esp. daverobev. I'm looking into the Couch Potato link you provided and Norbert's Gambit. I currently have a sum in my Questrade RRSP account in Cdn dollars that I am planning to use to buy an ETF of US stocks (probably linked to S&P 500). On the one hand, I don't want to procrastinate too long before making the buy because I am missing out on any potential gains until then but, on the other hand, I don't want to buy anything without satisfactorily understanding the implications, including tax implications. So I will do a little more research. Norbert's Gambit seems interesting but the first article about it I found (http://www.moneysense.ca/invest/norberts-gambit-a-better-way-to-buy-u-s-dollars mentions that " this technique only works if you can hold U.S. dollars in your account. Most brokerages donít allow this with RRSPs."

daverobev

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Re: US exposure for a Cdn investor - VOO vs VFV
« Reply #7 on: September 22, 2013, 03:02:04 PM »
Thanks a bunch, Mustachians, esp. daverobev. I'm looking into the Couch Potato link you provided and Norbert's Gambit. I currently have a sum in my Questrade RRSP account in Cdn dollars that I am planning to use to buy an ETF of US stocks (probably linked to S&P 500). On the one hand, I don't want to procrastinate too long before making the buy because I am missing out on any potential gains until then but, on the other hand, I don't want to buy anything without satisfactorily understanding the implications, including tax implications. So I will do a little more research. Norbert's Gambit seems interesting but the first article about it I found (http://www.moneysense.ca/invest/norberts-gambit-a-better-way-to-buy-u-s-dollars mentions that " this technique only works if you can hold U.S. dollars in your account. Most brokerages donít allow this with RRSPs."

Questrade absolutely allows you to hold USD. What you MUST do is go in and change the settlement currency to 'whatever the funds are in' or 'don't do any automatic currency conversions' because if you don't, they'll convert your converted funds straight back into CAD!

Ok, in my Questrade, under Account Management, in the side bar to the left there is 'Currency Settlement'. You want the setting for your accounts to be 'Trade Currency' not 'CAD' or 'USD'.

This affects dividends as well as sales.

Note for an RRSP you do not need to pre-convert your currency (if you're just using Questrade to do currency conversion rather than Norbert's Gambit), but in a margin account you MUST else you will be borrowing whichever currency you're short in.

N's G is good with DLR and DLR.U, both listed on the TSX. You buy one, journal it, and sell the other. I have not ever done it but I believe it'll cost either $30 or $70 as you have to phone in to sell. Quite why that makes the *buy* cost more I don't know, but there you go!