Best Canadian Dollar (CAD) ETFs for U.S Equities

You may already know that I’m a fan of index investing as I believe that it’s one of the best investment strategies for a wide range of investors from the beginner to the more experienced.

A reader recently emailed me about my thoughts on the best Canadian Dollar (CAD) ETFs for US equities.  While USD ETFs may have lower overall fees, CAD-based ETFs have a currency advantage as it can be a bit tedious converting from CAD to USD – especially if you want to reduce the cost as much as possible.  

For those of you interested, here is an article on how to reduce those pesky foreign exchange fees within a trading account.

Before we dig into answering the reader question, let’s rewind a little and provide some context for those of you new to index investing.

What is Index Investing?

The global stock market uses indexes to track a particular stock market sector/country.  For example, a US equity index like the S&P500, represents a basket of the 500 largest companies in the US sorted by market capitalization (size). 

The larger the company’s market cap, the more “weight” the company has on the index.  Each developed country has their own index that represents their largest companies and they commonly get added and removed from indexes as companies grow and shrink over time.

I have also just recently published an in-depth article about the differences between investing in the Canadian and U.S stock markets. It can help you understand which one is a better fit for your portfolio and investing goals.

Why Index Investing?

Now that we have the “what” taken care of, let’s talk about the “why”?  There are a number of reasons why index investing just works:

  • MERs matter – Lower fees mean that index investing can beat most equivalent active mutual funds out there over the long term. Remember lower MERs matter… a LOT.
  • Diversification – Indexing provides a low cost way for Canadians to get international diversification.  Canadian’s tend to have too much of their investments tied to Canada.  More on US equity ETFs below.
  • Simplicity – Index investing is  easy, passive and hands off.  With all the new ETF products out there today, you can essentially build a diversified, low-cost portfolio with a single all in one ETF.

Building an Index Portfolio

Now onto the good stuff.  To build a globally diversified indexed ETF portfolio, you’ll need index ETFs that cover the global markets.  Specifically, you’ll need ETFs to cover the following:

  • Canadian Index 
  • US Index
  • International Index (MSCI)
  • Emerging Markets
  • Canadian Bond Index

It’s a great time to be an investor because there are a number of ETFs providers available for Canadians.  Some of these providers include iShares, Vanguard, Horizons and the big banks!

While choice is great in that it drives competition to help keep fees low, too much choice can also be overwhelming. In this case, not only are there a number of providers offering very similar ETFs, they also offer the choice of ETFs in two currencies – CAD or USD.

Currency Battle: CAD vs USD ETFs

I could probably write a whole article on CAD vs USD based ETFs, but when it comes down to it, the cost of owning ETFs depends on the type of account that it’s held.  That is because there is often a foreign withholding tax (FWT) on ETFs with US and international coverage. However, as a rule of thumb, MERs of USD ETFs are generally lower than their CAD counterpart. 

On the other hand, as previously mentioned, even though it may cost less to own the USD version of the ETF, there are also currency conversion fees to account for.  Brokerages can charge as much as an extra 2.5% to move money between currencies.  There are ways to reduce the currency exchange fee, such as using Norberts Gambit, but depending on the brokerage, it can feel like a bit of work.

The next best thing, in keeping with the theme of simplicity, is to keep everything in CAD and to use CAD based ETFs when getting global exposure.

Best US Equity ETFs in CAD

Now that we’ve talked a little about the background and the why’s of index investing.  Let’s dig into the specifics of the topic at hand – US equity ETFs in CAD.

There are a number of ETFs that provide US coverage in CAD and here are some popular choices from various providers in both hedged and non-hedged.  

Broad US Coverage ETFs

ETF DescriptionMER
XSPiShares Core S&P 500 Index (CAD-hedged)0.10%
XUSiShares Core S&P 500 Index ETF0.10%
XUUiShares Core S&P U.S. Total Market Index ETF0.07%
VSPVanguard S&P 500 Index ETF (CAD-hedged)0.09%
VFVVanguard S&P 500 Index ETF0.09%
VUNVanguard U.S. Total Market Index ETF0.16%
VUSVanguard U.S. Total Market Index ETF (CAD-hedged)0.16%
ZUEBMO S&P 500 Index ETF (CAD-Hedged)0.09%
ZSPBMO S&P 500 Index ETF0.09%
HSHHORIZONS S&P 500 (CAD-Hedged) Index ETF0.11%
HXSHORIZONS S&P 500 Index ETF0.10%
THUTD U.S. Equity Index ETF (CAD-Hedged) (S&P 500)0.09%
TPUTD U.S. Equity Index ETF (S&P 500)0.09%

I generally like to stick with broad based ETFs as they are low cost performers over the long term.  Some of you may ask about more technology exposure as it’s the flavour of the day (or year).  Never fret, even with broad based US ETFs, you’ll get plenty of technology exposure.  Technology stocks have become so large that they have pretty much taken over the S&P500.  

For example here are the Top 10 Holdings of the S&P 500:

  1. Apple Inc.
  2. Microsoft Corp.
  3. Amazon.com Inc
  4. Facebook Inc
  5. Alphabet Inc A
  6. Alphabet Inc C
  7. Berkshire Hathaway B
  8. Johnson & Johnson
  9. Proctor & Gamble Co
  10. NVIDIA Corp

In Conclusion

Altogether, my favourite broad-based US equity ETFs in CAD are both low cost and non-hedged (slightly more efficient).

  1. For total US exposure – XUU – This is the lowest cost total US market ETF on the list with a low MER of 0.07%.
  2. For S&P 500 only exposure – VFV or ZSP – There are a few low-cost S&P 500 ETFs on this list, but VFV and ZSP are both cheap (MER: 0.09%) and provide relatively high liquidity/trading volumes. 
  3. For taxable accounts US exposure – HXS – I like this Horizons SWAP product for taxable accounts because you don’t pay any tax on the dividends, only capital gains when you sell.  This is also a strategic holding for children’s taxable portfolios as it would help avoid the dividend taxation that the parent would be expected to pay.

I've Completed My Million Dollar Journey. Let Me Guide You Through Yours!

Sign up below to get a copy of our free eBook: Can I Retire Yet?

FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
Subscribe
Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

5 Comments
Newest
Oldest
Inline Feedbacks
View all comments
I'd rather be playing outside
4 months ago

Hello,

Just a question about the swap based etfs from Horizons and the smith manoeuvre. I know your preference for the SM is with dividend paying stocks but what about these swap etfs? Held for the long term in a non registered account they would be tax efficient but not with out risk with possible regulatory changes. Would they still qualify with CRA as income producing investments if they don’t pay a dividend?

Thanks

Paul
6 months ago

Hello,

Excellent grouping of information. Hope you will update continually and/or expand the contents in the table gradually covering extra strategies, such as, sectors, geographies…

And if so, maybe consider adding couple more columns identifying currency, hedged, call/put, …

Appreciate it.

fbgcai
6 months ago

Hi FT,
very useful post, Thank you.
Under the S&P500 only ETFs you suggest VFV and ZSP but not THU – why?
– they all have 0.09 MER
The only reason I ask deal with TD Waterhouse and have a bit of in-house bias.

Linda Plater
6 months ago

great tips! I will have to check out these strategies with Interactive Brokers. Their exchange to usd don’t seem bad but as you know, these get slapped on and can be a surprise after the fact>

Joeyft
6 months ago

Big SECOND on VFV. Thanks!