[CAN] CAD or USD Index Funds?

[Aloysius_Poutine]

I did a quick search and didn't find this question, apologies if it's been discussed before.

I'm just starting with investing and I have some TD e-series mutual funds in my TFSA. I've been buying the canadian dollar US Index fund. The fund description says it gives me "currency diversification."

There's also the option to buy USD US Index funds. The distributions and MERs look about the same. Is one option preferable to the other? I don't know enough to think it through on my own.

Thanks!

[KarenO]

Just thinking it through, without having done any research, so maybe my impression will be off. 

But for both, there would be an element of foreign currency risk, being in USD.  I would think buying in CDN would be more favourable, because the foreign exchange would be done at an institutional level with likely more favourable rates.  If you are buying in USD yourself directly, I would be thinking you would be paying a retail exchange rate, unless you already have savings in USD. 

A few of us from the forum had a picnic in Vancouver today, and these TD e-series funds came up in conversation.  I am definitely going to have a closer look as they look good with such low MERs. 

[daverobev]

It depends.

You have to factor in two main things: Conversion costs and withholding taxes.

In an RRSP, you will probably be better off holding US$ directly, as you do NOT pay US withholding taxes. If you hold the CAD$ version, withholding taxes will be lost (because the unitholder doesn't know you'll be in an RRSP; generally it's just a CAD wrapper around the US fund).

In a TFSA it's debatable. Compare MERs. You will need to fill in a form or contact TD to make sure you only get 15% withholding, not 30%. That withholding is 'lost'.

In an unregistered account, you can claim the withholding tax as foreign tax paid.

There is a good post on CCP - try http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/ which also links to the theory in a previous post.

[Kazimieras]

+1 to what daverobev said.

TFSAs are tricky beasts since the taxation agreements haven't necessarily caught up to them yet.

As for which, look at the fees but also look what other investments you have. If you have them predominantly in Canadian equities and bonds, go for the US. If it is predominantly US-based, go for more at home. What you want is a good balance of items so that if one area dips, another one counterbalances it. The past couple weeks makes for a good example of this. If you had mostly Canadian investments, our dollar has been tanking. Having some US-based investments (in USD) means if the CAD drops, the value of the investments in the US funds increase (for Canadians at least).

For me, I try to be mostly international, a good part US and then a reasonable bit Canadian (like a 50: 30: 20 ratio). The Canadian economy isn't that big, so I don't try to overvalue it.