Buying US ETFs on Canadian vs US Exchange

When purchasing an ETF that tracks the US stock market (ie the S&P 500 index or Russell 3000), one is challenged with the question: Do I buy an ETF listed on the Canadian or US stock exchange?

In terms of exposure to the US dollar, it makes no difference.  While a US ETF found on the Canadian stock exchange might not seem to have the same exposure to the US dollar as one bought on the US exchange, the exposure is actually equivalent.  To explain, a Canadian listed ETF that tracks the S&P 500 index, does so by purchasing all of the stocks in that index. A US listed ETF does the same thing, so exposure to the US dollar is equivalent.  This will of course not be true if you purchase a CAD hedged ETF on the Canadian market, but that is generally not recommended for the US equity portion of your portfolio.  Having exposure to the US dollar further diversifies your investments, which is a good thing, and what you want from your US equity ETF. 

While using CAD is convenient, it can also be expensive.  US listed ETFs have benefits and should be considered in some cases. They generally have a significantly lower MER. You can also save on withholding taxes (on dividends paid) if the ETF is held in an RRSP.  Some Canadian ETFs simply invest directly in another US listed ETF, and charge a significantly higher MER for the ‘currency convenience’.  One example is VUN, a Canadian listed ETF from Vanguard which invests directly in it’s US equivalent VTI.  The MER for VUN is 0.17, more than 5 times higher than VTI.

One challenge with investing in US listed securities is that you need to convert your Canadian money into US dollars, and when you do this through a bank or online brokerage they charge a fee for exchanging the currency, which is typically quite high (often over 2%).  The good news is that there is a method of converting the currency without paying an exchange fee. The method is called Norbert’s Gambit, and while it may sound complicated, it is actually relatively simple.  Here is a great link explaining how to do it:

https://reviewlution.ca/resources/norberts-gambit/

It is probably only worth purchasing a US listed ETF if you plan on holding it in your RRSP, and you are purchasing a large amount (as per the article above, probably at least $10,000).  If you’re using smaller amounts of money to purchase the ETF it is probably best to just buy a Canadian listed fund.  This is because there are still costs to consider when converting money using Norbert’s Gambit.  One of these costs are trading fees, which generally range from about $5 to $10 per trade.  Another cost is related to the bid and ask spread, and can be explained this way: when buying an ETF such as DLR, you have to purchase at the current ‘ask’ rate, which is the lowest price a seller will accept for the security, and is almost always slightly higher than the ‘bid’ cost. 

Then, after your shares are journaled over to DLR.U, you must sell the ETF and a similar situation exists.  When selling you receive the current ‘bid’ price, which is the maximum price the market will bear for that ETF.  Since the ‘ask’ rate is almost always higher than the ‘bid’ price, there is an inherent cost for converting currency in this manner.  It is much less costly than paying an exchange fee, but can still be significant when converting amounts smaller than $10,000, and can nullify the benefits of owning the US listed ETF.  In these cases investors are usually better off simply purchasing the ETF on the Canadian exchange.

So, we have a little bit to unpack here.  First, remember that your exposure to the US dollar is the same when it comes to Canadian and US listed ETFs.  Second, it is generally not worth converting to US dollars to purchase US listed ETFs unless you have more than $10,000 and are holding the investment within your RRSP.