Is it worth it to buy U.S.-listed ETFs?

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Q What are the pros and cons of buying ETFs on an American exchange versus a Canadian one? — Francis, Collingwood, Ont. A Investors in Canada have a lot of choices when it comes to ETFs. Not only can we buy more than 500 of them on the Toronto Stock Exchange, but we have access to a couple of thousand more on U.S. exchanges. A Couch Potato investor can build a very efficient portfolio using a combination of Canadian and U.S.-listed ETFs, but cross-border shopping involves a little savvy. There’s no question that U.S.-listed ETFs offer some significant advantages over those trading in Canada. They are often cheaper, for one, especially for international and emerging markets. This is most obvious in the fee differences between funds offered by the U.S. and Canadian arms of Vanguard and iShares. It’s not unusual for the Canadian versions to have management fees that are twice as high as their U.S. counterparts. That said, we are talking about small dollar amounts here. An international equity ETF might cost 0.20% in Canada and only half as much south of the border, but that’s a difference of $10 per year on a $10,000 investment.

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Another advantage of U.S.-listed ETFs is that they may be more tax-efficient in RRSPs. A full explanation is complicated, but the main idea is that U.S. and international stocks are subject to a withholding tax on dividends. If you hold U.S. or international stocks using a Canadian-listed ETF, these withholding taxes are lost in an RRSP. However, U.S. securities held in an RRSP are exempt from withholding taxes, thanks to a tax treaty between the two countries. So if you use U.S.-listed ETFs for your foreign equities in an RRSP you may be able to reduce or eliminate this tax drag.

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Note this only applies to RRSPs and related retirement accounts (such as locked-in RRSPs and RRIFs). There is no similar tax advantage to using U.S.-listed funds in TFSAs, RESPs or non-registered accounts.

The loonie disadvantage

Unfortunately, the lower fees and tax advantages of U.S.-listed ETFs come at a cost. Trades on U.S. exchange must be made in U.S. dollars, so if all you have are loonies you will need to convert your currency before making a transaction. Unfortunately, the rates charged by online brokerages are generally terrible, especially on smallish amounts, and these costs can erode much or all of the benefit. (You can convert currency much more cheaply using a technique called Norbert’s gambit, but many investors will find this intimidating.) If you are investing in a non-registered account, there’s another downside to using U.S.-listed ETFs: additional bookkeeping. Investors need to report their capital gains and losses in Canadian dollars, so if you trade U.S. securities you are responsible for recording the exchange rate on the day you buy and the day you sell. Brokerages don’t do this for you, so you need to make the calculations yourself and report any gains or losses accurately when you file your tax return. On balance, I recommend most do-it-yourself investors stick to using Canadian-listed ETFs. This is always the case for TFSAs, RESPs and taxable accounts. There are still advantages to using U.S.-listed funds in your RRSP, but only if you are able to convert your currency to U.S. dollars at a low rate.

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BERNARD TOEWS says:

March 12, 2020 at 9:14 pm

Horizon’s has a S&P 500® INDEX ETF (TSE ticker symbol is ‘HXS’). It is my understanding that it can be purchased with Canadian dollars. It is a ‘synthetic’ ETF since it does not own any stocks in the S&P 500 but instead the returns of the Index are provided by a third party, which I am advised is a Canadian bank. Furthermore, the ETF does not pay dividends. The value of the dividends are built into the share price. Also, there is a .30% ‘swap fee’. I want to buy the ETF with my TFSA funds. If all the gains are capital gains, will the IRS in the USA withhold any taxes when I sell the shares? If so, can you advise what the % might be. Also, since the ETF does not own any actual shares in any USA corporations, would the IRS have any right to tax capital gains that are earned in Canada. If there are no withholding taxes by the IRS (and there can’t be any Canadian taxes on any gains on investments in a TFSA) what possible risks are there? This seems too good to be true. That’s why I’m worried. I keep thinking I must be not understanding something. I would appreciate any guidance you can offer.

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Don Cooper says:

June 30, 2021 at 12:03 pm

The return of ihi in the US is stellar. Is it worth it for me , a Canadian , to buy it for the long term if I have a US account?

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