The best way for Canadians to invest in the S&P 500

Two men arm wrestling

How can Canadians invest in the S&P 500?

The S&P 500 is a core holding for many investors. It’s an index comprising 500 of the largest companies in America, and has delivered excellent returns to long-term investors for over a hundred years.

By far the easiest and cheapest way to invest in the S&P 500 is through exchange-traded funds (ETFs).  Unlike mutual funds, ETFs can be traded throughout the day and are listed on stock exchanges, like the TSX. Most importantly, ETFs generally have lower fees than mutual funds – it’s not unusual to see fees of less than 0.10% per year, or about $1 for every $1,000 invested.

All you need to invest in ETFs is a brokerage account. If you’re just getting started, I always recommend Questrade – they don’t charge commissions for buying ETFs!

There’s three ways Canadians can invest in the S&P 500 using ETFs:

  1. Purchase an ETF tracking the S&P 500 in American dollars on the NYSE
  2. Purchase an ETF tracking the S&P 500 in Canadian dollars on the TSX

Between these two options, there’s several good ETFs to choose from and a variety of factors to consider.

The best S&P 500 ETF on the NYSE

There’s three major ETFs tracking the S&P 500 on the NYSE. Here’s a summary of all three:

SPY

IVV

  • Market cap: $180 billion USD
  • MER: 0.04%
  • Fact sheet

 VOO

  • Market cap: $120 billion USD
  • MER: 0.03%
  • Fact sheet

Between these three, SPY is a clear loser due to its higher management fee. There are some nuanced differences between these funds, for example SPY is a UIT, but the simplistic view of lower fees being better holds based on past performance.

Between IVV and VOO, I’d recommend VOO due to the slightly lower management fee, but both are excellently priced and highly liquid, so we’re really splitting hairs here.

The best S&P 500 ETF on the TSX

There’s six major ETFs tracking the S&P 500 on the TSX. Here’s a summary of all five:

XSP (currency hedged)

XUS

VSP (currency hedged)

ZSP/ZSP.U (more on the ‘.U’ later)

HXS (synthetic, more on this later)

  • MER: 0.10%
  • Swap fee: up to 0.30%
  • Market cap: $1.7 billion
  • Fact sheet

VFV

I’ll return to the idea of currency hedging and its consequences in a moment, but for now let’s compare apples to apples.

VSP has both a lower management fee and market cap than XSP. You’re likely to hold these ETFs for years, if not decades, so lower fees trump a small increase in liquidity. I’ll give this one to VSP.

It’s the same situation with VFV and ZSP, where I have to give the win to VFV.

However, it’s worth noting that ZSP has an important advantage in that it trades on the TSX in both USD and CAD. To buy the USD version you’d buy ZSP.U, and to buy the CAD version you’d buy ZSP. For more on this, check out my article on Norbert’s Gambit.

But what is currency hedging? The problem with investing in the S&P 500 with Canadians dollars is that you’re buying companies that both trade and operate in American dollars. If the American dollar weakens relative to the Canadian dollar, your investment is worth fewer Canadian dollars. Conversely, if the American dollar strengthens relative to the Canadian dollar, your investment is worth more Canadian dollars. This is called currency risk.

Let’s look at a chart comparing VSP (currency hedged) and VFV (unhedged) over the last 6 months, with dividends reinvested.

  Compartive chart of VSP (currency hedged) and VFV (unhedged) over the last 6 months with dividends reinvested   We can see that the currency hedged ETF significantly outperformed the unhedged ETF. This is because the American dollar weakened relative to the Canadian dollar over the summer, from a high of $1.36 CAD in May to a low of $1.21 CAD in September.

But this doesn’t mean that VSP is better. The American dollar could easily have strengthened during that time period. And what if the exchange rate stayed the same? In that case VFV would have done better because the MER is lower and money wouldn’t have been wasted hedging against currency fluctuations. Remember that hedging costs money (albeit it’s relatively inexpensive to hedge USD/CAD for institutional players).

Because of currency fluctuations, there’s no clearly superior ETF. However, we can say that VSP is a safer investment for Canadians. Think of it this way: a bet on VFV is a bet that the S&P 500 will go up and that the US dollar won’t weaken, whereas a bet on VSP is just a bet that the S&P 500 will go up. For risk adverse investors, VSP is probably the better bet, but ultimately the decision depends on the long-term performance of the American dollar.

HXS: the odd one out

You may have noticed that I haven’t discussed HXS yet, the fifth Canadian S&P 500 ETF.  This one is unique, as it’s a synthetic ETF.  HXS does not actually own any of the stocks in the S&P 500, but it is provided with the returns of the index by a third party (in this case a major Canadian bank).

The consequence of this arrangement is that HXS does not pay dividends, instead they are built into the share price of the ETF. There is also an additional 0.30% ‘swap fee.’ This ETF structure can have serious tax benefits, as capital gains can be taxed at a more favourable rate than dividends, depending on your marginal tax rate. Capital gains taxes can also be delayed for years by simply not selling your investment, whereas dividends are always taxed the year you receive them.

Avoid HXS in a registered account, because there are no tax advantages and you will still have to pay the 0.30% swap fee.

The bottom line here is that HXS is a complicated product, and you may want to talk to your accountant before investing.

Withholding taxes

Here’s something else to consider: if you’re willing to buy VFV and expose yourself to currency fluctuations, why not just buy the S&P 500 in American dollars using VOO? After all, VOO has a MER of 0.03% compared to VFV’s MER of 0.08%.

Furthermore, if we pop the hood on VFV we can see that its only holding is VOO – the American listed ETF!

If you have access to American dollars without paying significant exchange fees (for example by using Norbert’s gambit), then this argument is sound, at least before considering taxes.

American listed ETFs are subject to a 15% withholding tax on dividends that may or not apply, and may or not be refundable when you file your taxes, depending on the account you’re trading in. This becomes even more complicated when a Canadian listed ETF owns an American listed ETF.

Here’s a flow chart to help you figure out whether the dividend withholding tax applies. Further reading can be found herehere and here.

 withholding tax flowchart

The most important things to conclude from this chart are the following:

  • If you own a Canadian ETF with American ETFs or stocks in it in any registered account, you will always pay the 15% dividend withholding tax and it is not refundable

  • There are tax advantages for owning US listed ETFs rather than Canadian listed ETFs in an RRSP, RRIF, LIRA, LIF or LRIF

You may also be wondering whether the 15% withholding tax is significant. The answer is yes, at least compared to the MER of these ETFs.

VOO currently yields 1.74%. To find the cost of the 15% dividend withholding tax we apply the formula 15% x (yield – MER) = 15% x (1.74% – 0.04%) = 0.26%. This is the net yearly cost of the withholding tax. Compared to the 0.04% MER of the ETF, this is a big expense.

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The final breakdown

The takeaway here is that there’s no one size fits all answer to the problem. There are four great options to choose from, and you’ll need to consider your tolerance for currency risk and the type of account you’re trading in to determine which one is ideal for you.

Here’s a final flowchart to help you decide.

127 thoughts on “The best way for Canadians to invest in the S&P 500”

  1. New Investor & Immigrant

    Thanks for the wonderful article, I am new to canada & investing and I am planning to invest in VFV in my TFSA account.
    My short term(1-1.5 year)goal is to buy a house here. I am still bit confused to start with TFSA or RRSP ?
    My initial thought was to invest in RRSP and use the home buyer plan to make the down payment for the house. But investing in stocks for short term goals is not recommended.
    Can you please suggest how to go about this situation?
    How to make safe investments in RRSP ? & how to proceed with TFSA & RRSP with ETFs as in which one to use & max out first.

    Thanks!

    1. You’re right, if you want to buy a house in 1-2 years, stocks are too risky. However, you can use both your TFSA and RRSP for investments other than just stocks. This includes bonds, preferred shares, GICs, ETFs replicating savings accounts etc. Some examples of this would be ZST.L.TO and PSA.TO, which are ultra low risk, but will only return about 2% a year.

      If your goal is to get the biggest down payment possible, the HBP is a great way to do this. Your contributions to an RRSP are pre-tax, whereas your contributions to a TFSA are post-tax. When you use the HBP you don’t have to pay tax on the withdrawal either, so essentially you can use $35,000 in pre-tax income towards your home purchase. The only downside is you have to repay the amount withdrawn, whereas with the TFSA there’s no strings attached.

  2. Need advice for USD in non registered account....

    Great article! I have a bit of a different scenario. I have $500,0000 USD in my non registered account just sitting there. My TFSA, RESP, and RRSPs are all maxed out. Is it smarter for me to convert this USD to CAD using Norbert’s Gambit and buy VFV or would it be better to stick with my USD and buy VOO? I also do not want to have any trouble dealing with any US estate tax situation. Any advice on what you would do in my position?

    1. If you invest in CAD your taxes will be a bit easier because you won’t have to worry about what the exchange rate was each time you get a dividend or sell some shares. If you’re withdrawing from your account for your day to day expenses, it’s also nice to have the funds in CAD already, because that’s the currency you’ll actually be using.

      On the other hand, USD denominated funds typically have lower fees and more liquidity. It would also cost you a good amount to convert $500,000 USD to CAD.

      Another consideration is that dividends from Canadian companies are taxed much more favourably than dividends from American companies.

      It’s a tough question, and with that amount of money it may be worth hiring a fee-for-service advisor for a few hours to talk it over with you.

    1. Unfortunately you won’t be able to do that directly. VFV and VOO both track the S&P500, but they’re technically different funds. You could sell your VFV and use Norbert’s Gambit to convert the proceeds to USD and then buy VOO though!

  3. I have 11k in my rrsp and want to invest in ZSP (CAD) but confused about the withholding tax you’re talking about. Is it a bad idea to put it in ZSP in my rrsp account?

    1. It would be slightly more tax efficient to invest in a USD-denominated fund in an RRSP, but it’s a small optimization that might save you ~0.2%/yr. With $11,000 it’s not worth the stress worrying about it – ZSP is fine!

  4. Hi! I just started investing (I only have about $1000 to invest but wanted to get started as a student) and was considering investing half of it in VFV through a TFSA and as my income grows, putting more money into VFV over the years. What do you think the best long term strategy is for me? Keep my money in VFV? Or convert to USD and buy an ETF in USD? Thanks!!

    1. VFV is a great choice for a long term hold. Eventually you should incorporate bonds, Canadian equities, and international equities into your portfolio as well.

      For now I’d keep it simple and stick to CAD. There isn’t much benefit to buying a USD ETF in a TFSA, and with just $1,000 it’ll be quite costly to convert currencies, even with Norbert’s Gambit.

  5. Hi there,
    I hold VFV in my RRSP. Recently I have opted to place the dividends in a DRIP in this RRSP. Is there still a witholding tax (which can not be recovered)?

    I am also wondering if the same principle applies to individual US stocks- by placing them in a DRIP will they be subject to withholding taxes?

    Much appreciated.

    1. Setting up a DRIP won’t affect withholding taxes in any way – a withholding tax may or may not apply regardless of whether you have one set up.

      VFV will have a non-recoverable withholding tax on its dividends in an RRSP, because it’s a Canadian-listed ETF. Remember that this tax is really quite small (15% of dividends), but if you’re dealing with a large sum of money you could avoid it by converting your funds to USD and investing in something like IVV or VOO instead.

      1. Well understood- thank you very much. My VFV position is large enough to be concerned about the witholding tax in my CAD RRSP. Using Norberts Gambit in my RBC DI account I successfully have transferred money to my USD RRSP and will use it to purchase VOO or IVV. When comparing returns, IVV has a higher dividend yield of 2.3% compared to VOO with 1.75%. In terms of 5 year performance each of these funds is exactly the same, however if you compare performance ‘since inception’, IVV is 5.83% and VOO is 13.54%. Obviously IVV has been around longer than VOO, but is this ‘since inception’ performance indicator, in any way usual in deciding between the two funds? Merci beaucoup!

        1. Since inception return isn’t a good metric for the reason you stated – the funds haven’t been around for the same time period. As an extreme example it wouldn’t be fair to compare the since inception return of a fund launch just before the 2008 financial crisis to one launched just after it.

      2. Pushed the send button too soon and wanted to also ask if VV and SCHX might be good comparables to VOO and IVV and reasonable choices for USD RRSP. .

        Merci!!

        1. Generic US large cap ETFs like VV or SCHX will perform very similarly to an S&P500 ETF, but there are some small differences. For example Tesla is a large cap stock but is not a component of the S&P500. I think either option can be a great choice.

  6. Need your opinion!

    Hi,

    First of all, thank you for posting this useful info. It helps me getting into investing!

    So after some research, I decided to hold VOO in my RRSP but I’m not sure about TFSA.
    Do you think it’s better to hold S&P 500 ETF like VSP? Or holding Canadian market ETF (I take it as Canadian version of S&P 500) such as XIC would be better in TFSA?

    1. If you have a non-registered account that’s the best place for a Canadian market ETF because dividends from Canadian companies are taxed much more favourably than dividends from international companies. If you’re still working on maxing your TFSA and RRSP, and don’t have a non-registered account yet, this isn’t really a consideration because your dividends aren’t being taxed anyway (besides the withholding tax on US equities).

  7. Thanks for the great article. Does this mean that buying VFV in an RRSP is better than in a TFSA? I have no access to USD and I’m quite young (in both age and experience in investing), my goal is to put most of my money in ETFs. Additionally, whats your opinion on BMO’s ETFs compared to Vanguard’s? Thank you!

    1. VFV is a great starting point in a TFSA or RRSP.

      As your account grows it is more tax efficient to own a US-listed ETF than a Canadian-listed ETF within an RRSP. Keep in mind this is a very small optimization when you’re starting out, so I wouldn’t sweat it.

      BMO, Vanguard and Blackrock all have great products. The key metric you want to look at when choosing an ETF is MER.

  8. For a non-registered account that has US dollar and Canadian dollar separate sub accounts, what do you think of the strategy of holding VFV in the Canadian $ account and an equal amount of VOO in the US dollar version of the account?

    Wouldn’t this be an effective strategy to nullify the swings in currency exchange rate?

    1. No need to reply to this previous query I say poured further into your excellent material and realize that the only proper way to hedge is worth a currency hedged ETF like VSP, NOT a combination of VOO and VFV.

      So I have a new version of the question: is it best to, in a non-registered account, just invest in the VSP for the entire position of holding a currency protected S&P 500 position in a long-term portfolio?

      1. If you’re concerned about currency fluctuations – especially a strengthening Canadian dollar – then yes, you can simply buy VSP and not have to worry about it! Just remember that currency fluctuations can sometimes work to your advantage, so many investors choose not to currency hedge.

  9. Harsh Gotawala

    Hey this article is great. Thanks for sharing. I own few VFV’s in my TFSA account and i was looking forward to buy VUN as it has a great annual returns and its MER is only 0.15%. My question is, would you recommend this a buy at this market? Please let me know. Thanks

    1. VUN is a total US market ETF, and it will perform very similarly to VFV. The difference is that VUN also invests in small and medium sized companies, which typically have more risk and slightly higher returns over long time periods.

      As for whether or not to buy in this market, well, it’s anyone’s guess. It’s been a wild ride. I just keep investing at regular intervals and try not to let the fluctuations get to me!

  10. Brent Chernoff

    Hello, I really like your site. I’m a long term investor with 30 years left before I’ll need my funds for retirement. For my S&P 500 fund (CAD) I was wondering if it makes any sense to purchase 50% unhedged and 50% hedged right now? Here is my reasoning: I was thinking since right now the Canadian dollar is quite low, and I think it might go up in the next 5-10 years, I could contribute half of my US investments to the hedged fund and then when the Canadian dollar rises to a higher value eventually, like maybe an exchange rate of 1.20 or so (a number where I fear the CAD may go down again), then I would sell the hedged fund and put it all in the unhedged, and then keep contributing into the unhedged fund until the Canadian dollar gets really low again, and then repeat the process? Potentially I’d go through that process a few tiles until I retire. Does this make any sense?

    1. Essentially what this strategy would do is attempt to buy USD when the CAD is strong, and sell USD when the CAD is weak. It’s an interesting idea, and it would work on the same principle of mean reversion that makes rebalancing your portfolio so important. The risk is that mean reversion may not happen at some point in the future; it could be that a 3:1 exchange rate becomes the norm 50 years from now. Try looking up “mean reversion forex” and you’ll get a lot more info on this strategy.

  11. Hi I have VFV in my TFSA and would like to balance it with an All World Stock exposure except Canada and USA ETF. Is there a ETF on the TSX that fits this description? I appreciate your help if you have already investigated this…

    1. XAW is an all countries excluding Canada ETF, and VIU is an all countries excluding North America ETF. Hope this helps!

    2. NEED YOUR OPINION

      Need your opinion.
      Hello, I am just starting investing journey since I just turned 18. I plan on holding a couple Canadian dividend stocks in my TFSA, and want to get exposure to the U.S market so I’m planning on holding VFV. My question is I don’t know where to hold VFV. I don’t have U.S dollars only CAD. What will be the best way for me to invest in VFV?
      Thank you

  12. James Rozario

    First time in this site. I never thought about investment in my life , I am 60 now thinking to invest little I could before I retired. So any help will be appreciated.

    Thanks
    James

    1. Good luck with your investing journey! It’s never too late to start, but it’s important to remember that as you get closer to retirement you should take on progressively less risk.

  13. Great Article! 5 stars!!

    Hi,
    Great article in a simple language which is not too technical and easy to understand!

    Question for you. I have around $10k to invest in RRSP and $20k to invest in TFSA (will be transferring from TD mutual fund TFSA account). I am planning to invest 60-40 in VFV-VGRO or XUS-XGRO.
    I do understand the benefit of converting into USD and then investing in VOO but I really want to keep it simple and just buy in CAD and keep investing on a monthly basis ~ $1k.
    Do you think VFV-VGRO / XUS-XGRO is a good option? and If Vanguard is better than ishare or vice-versa. I am spending too much time comparing the two.
    Another question is instead of buying shares in my non-reg account I am thinking of buying VFV. Do you suggest any other ETFs for non-reg accounts? Again my investment on a monthly basis would be around $1k

    Please let me know what do you think and would advise?

    Again, great work, I am bookmarking your site and will come back to read other articles. Do you have a Youtube channel as well?

    Cheers!

    1. Keeping it simple and sticking to CAD is absolutely fine – dealing with USD conversions is a headache for a lot of people, and frankly you need a lot of capital for the tax savings to be meaningful.

      Generally speaking there’s no real difference between Vanguard and iShares – they’re both giant, trustworthy asset managers. However, between XGRO and VGRO there are some subtle differences. For example, XGRO has a 37.4% allocation to the US market compared to 33.5% with VGRO. You can check our their fact sheets for a more detailed breakdown:

      VGRO
      XGRO

      Personally I’d go for XGRO because the MER is 0.05% lower, and I’d like a bit more allocation to US equities, but there’s a lot of personal preference here.

  14. Thanks for providing some clarity.
    I want to start investing in S&P 500 with Questrade. I have both US and CA dollars.
    Which account is better to maximize investment based on US and CA, self direct account, RRSP or TFSA account?

    1. RRSP – USD, as this will allow you to avoid the dividend withholding tax

      TFSA – CAD, since the withholding tax is unavoidable and you’ll save on currency conversion fees

      Margin – the dividend withholding tax is recoverable as a tax credit if you invest in USD, but dividends from Canadian companies are taxed at a lower rate so you may want to be overweight Canada depending on your situation and goals

  15. Great article!
    I recently opened a self-directed RRSP with TD bank and would like to invest in a Vanguard S & P 500 ETF. My RRSP allows me to invest in both the U.S,. and Canadian markets. Would you recommend I invest in VOO rather than VFV to avoid taxes on dividends? To minimize currency exchange fees when purchasing VOO, could I use Norbert’s Gambit to invest in DLR and sell to DLR.U and then purchase VOO? Thank you fro any help you can provide.

    1. It depends on the size of your account, but generally you’ll want your RRSP to be invested in American-listed ETFs. This will allow you to avoid the 15% dividend withholding tax, which can really add up over time. If the S&P500 is yielding 2% that’s 0.30%/year in tax savings, and those savings compound over your career.

      That said, if, for example, your account has $10,000 in it you’d only be saving about $30/year in taxes, which may not be worth the trouble to you.

      Norbert’s Gambit is definitely the way to go for currency conversion, just make sure that you’re converting enough money at a time that the savings on the exchange rate justify the additional transaction fees you’ll incur.

      Hope this helps!

  16. Hi, I´m new to investing and your article was great to get started. Loved it. I have $10,000 US and $10,000 CA in a TFSA. I´m interested in investing in S&P 500 index. Which ETFs would you recommend for my US and which for CA?

    1. Hey, so in a TFSA you’ll be paying a dividend withholding tax to the IRS no matter what, so your two considerations are:

      1) How much it costs to own the fund (MER)
      2) Whether or not to currency hedge

      You’ll want the lowest MER, so for your US funds VOO is a great choice at just 0.03%. IVV is another option at 0.04%. These are really small differences and there probably won’t be a noticeable difference between these ETFs. For your CAD funds VSP (hedged) and VFV (unhedged) are two great choices, each with a MER of 0.09%.

      Whether you decide to currency hedge or not depends on if you think the USD will weaken or strengthen against the CAD over your investment’s time horizon. If, like most people, you just don’t know, I’d suggest the unhedged option. With regular contributions currency fluctuations will not be too important in the long run, since over the coming years you’ll be buying at times when the CAD is strong and at times when it is weak.

      Hope this helps!

    1. XUS is nearly identical to VFV by Vanguard, it’s unhedged with a MER of 0.10% – I just missed it when I wrote this article. It cannot be used for Norbert’s Gambit as it is not cross-listed.

      Cheers

  17. Thanks for the article and it’s very informative. I have a question on transferring ETF stocks. If a Canadian PR holder staying in US is moving back, Can VOO ETFs in US regular brokerage account be transferred to a Canadian brokerage account? Is it converted to VFV?

    1. When you’re transferring brokerages request a transfer “in kind” and you’ll keep all of your shares as they are. No, VOO will not be converted to VFV. Even though they replicate the same index they’re different securities. You can still own VOO no problem in Canada!

  18. Hi, thanks for this amazing write-up!
    I am planning to invest $10,000 in my TFSA account in tracking S&P 500. In that case I can ignore the withholding tax advantage in the US ETF and just invest in either VFV or VSP?

    Since it is only 10k, do you think it is worth it to currency hedge (VSP) with the higher MERs?

    thanks!

    1. Hi, thanks for the comment!

      Since you’re trading in a TFSA you will lose the withholding tax no matter what, so VFV/VSP is the way to go.

      Your decision of whether to hedge or not shouldn’t really be impacted by the MERs of the ETFs you’re considering, unless there’s a really big difference between them (there isn’t for VFV and VSP). Hedging only makes sense if you have conviction that the Canadian dollar will strengthen against the American dollar in the long run, something that no one can really predict. Personally my investments are unhedged.

  19. The info was very helpful. As a beginner investor, it is hard to choose best ETF. So much info out there to consider. Do I have to consider yearly return % like 1yr, 3yr, 5yr to choose ? another Q.S, I have RESP for 5yr, realized didn’t gain at all. That is mutual fund and provider MER is 2.5%. Should I consider to switch to ETF or index fund that is low fee? I have no one to ask other then financial adviser.
    Thank you

    1. Choosing the “best” ETF is a tough problem that is very dependent on your situation and goals. My advice is to keep learning as best you can and eventually things will start to make sense.

      With regards to you RESP, a MER of 2.5% is very high. There are great all-in-one ETFs out there, such as VGRO and VBAL, with fees of less than 0.3%. I would definitely look into a lower cost alternative to your current fund.

  20. Need some help with exposure to the S&P 500

    Hi,

    Great article. I am really struggling to make sense of how I can approach investing in the S&P 500 with both my RRSP and TFSA accounts sensibly. I have just started out and discussed with my friend about the strategy of which ETFs to hold where. I currently hold roughly $500 of VFV within my RRSP account as it pays dividends and holding it within my RRSP helps avoid having to pay that nasty withholding tax.

    In my TFSA, I hold a mix of HXS and and XSP and really unsure whether I should just focus on XSP being hedge funded or HXS and its complex swap based mechanics that I am unsure how it will truly impact me long term. What ETF would you recommended for my TFSA for S&P 500 exposure but doesn’t kill me with withholding fees or high cost. Is my approach to my RRSP and TFSA off all together?

    Thanks again for your help!

    1. Hey, thank you for your comment!

      VFV will not protect you from withholding taxes in your RRSP because it is a Canadian-listed ETF. Essentially what happens is the fund pays the withholding tax internally, so even though you don’t have to pay anything directly the tax will be reflected in the fund’s overall returns. Consider investing in an American fund like VOO to get around this problem.

      I would also divest from HXS in your TFSA. The advantage of this fund is that it doesn’t pay dividends, which can be beneficial to people in a high tax bracket trading outside a registered account. I’d focus on XSP if you want to currency hedge and VFV if you don’t.

      Keep in mind these are very small optimizations, and frankly you can’t go wrong with what you have now. Hope you find this helpful!

  21. Great Article!

    Question about hedging etf’s, you stated they hedged against currency depreciation, but do they benefit from currency appreciation?

    Also can you advise best options for Canadians to invest in gold and oil.

    1. Hedged ETFs will not go up or down due to changes in the exchange rate. Unhedged ETFs will go up if the Canadian dollar weakens, and will go down if the Canadian dollar strengthens. This is a bit unintuitive, but a weakening Canadian dollar is actually good for you if you own American securities … it just makes it harder to buy them in the future!

      US listed gold: NYSEARCA:GLD
      Canadian listed gold: TSX:HUG

      Investing directly in oil is quite challenging. NYSEARCA:USO attempted to replicate oil prices using futures, but this is actually quite problematic and has been the subject of a recent controversy (https://www.bloomberg.com/news/articles/2020-04-27/u-s-oil-fund-starts-moving-out-of-its-june-wti-position).

  22. Fantastic article, this was super helpful and informative! Just for my own clarification, what are the tax savings for having a US ETF (like VOO) vs a Canadian ETF (like VFV) in a non-registered corporate account? Is the withholding tax on the dividends the only consideration or is there more for me to think about? I have around $100k in my corporation that I would like to start DCA’ing into the market so I am wondering if it would make sense to use Norbert’s Gambit to get VOO. I also saw in an earlier comment that you suggested using ZSP.TO/ZSP.U.TO to do Norbert’s Gambit so that you can participate in the market while waiting for the shares to be journaled–do you know of a similar Nasdaq 100 ETF that has both a Canadian and US equivalent which I can use for a similar purpose?

    1. Thanks for the question! Let me preface this by saying I’m not a CPA, so definitely run any corporate investment decisions by your accountant first.

      In a non-registered account you’ll have to pay the American dividend withholding tax, plus whatever Canadian taxes you’d usually pay on dividends. The difference between VOO and VFV is that with VOO you can use the American dividend withholding tax as a credit towards your Canadian taxes (tax form T2209). This rule is in place so that the dividends aren’t ‘double taxed.’ You can’t do this with VFV because the withholding tax is paid internally by the fund, so you’ll never get a receipt with a record of you paying taxes to the IRS. A $100,000 investment in the S&P 500 today would incur an annual withholding tax of about $250/year, so whether you want to go with VOO or VFV really depends on whether that amount justifies the trouble for you.

      Norbert’s Gambit – for some reason the ETF providers in Canada really don’t want to give us a USD denominated Nasdaq 100 fund on the TSX. In fact I don’t think we have an unhedged Canadian dollar option either. Journaling will work for Norbert’s Gambit as long as the CUSIP number of the cross-listed security matches. Most of our major companies are cross-listed (Suncor, Enbridge, RBC, Telus, etc.) so you could use those as a proxy for the market while you’re converting currencies.

      1. Ah that is very enlightening. Thanks so much for spelling that out for me! Regarding Canadian Nasdaq ETF’s one that I was looking at was ZNQ. From my understanding it is unhedged but last I looked the trading volume was pretty low.

  23. 0.69 USD dollar, no USD to invest, best option?

    Excellent article!

    Currently the Canadian dollar is getting hit hard as well as the market. I’m looking at investing in the S&P 500 so your article is very relevant.

    I think the Canadian dollar will rise from here (0.69 US). I have to USD to invest. I can hold it in an RRSP or TFSA.

    I’m not sure if interpreting your article correctly. Am I better off holding a CDN ETF with hedging in my RRSP account (at least until the dollar improves)?

  24. Great Article

    Very good article, I have no rrsp or tfsa etc. New to investing in anyway just been saving slowly .05% bank saving accounts. Thinking this could be good entry point due to world circumstances. Would like to start Questrade account & invest life savings 100k should I convert to us or stay cad ? Cad is very low right now compared US. Thanks for your time! I’m always late to party.

    1. Hey, thanks for the comment. At the very least you should move your savings into an account with a better yield – EQ Bank and a few others are offering over 2% interest at the moment. I do think the global pandemic presents an opportunity to enter the market, but it is incredibly volatile at the moment and no one knows when we’ll hit the bottom. If you buy in now you need to realize your savings could fluctuate 5% a day in any direction for months to come! This is hard for even seasoned investors to stomach, so if you do decide to buy in I’d be very mindful of your personal risk tolerance and consider buying in very slowly. That said, it wouldn’t hurt to open a brokerage account, even if you don’t fund it, just to have it ready to go in case you’re ready to buy in down the road.

  25. As I write this the Dow & TSE futures are again projecting another negative day on the North American markets. I currently have excess cash and looking at ETFs to add to my recently opened Questrade TFSA. I’m 54 & no longer have RRSP contribution room. With the market uncertainty & falling CDN$ I’m looking at VFV.TO as my best option. Would you agree?

    1. It’s really impossible to say how much further the market could sink, but the worst case scenarios look pretty dire. I’d start by asking if this is money you can afford to lose, and if the answer is no it’s probably wise to avoid the market for now.

  26. Dominique Millotte

    Well done!

    Great article.
    Quick one: not knowing , I purchased VOO in my DI account and didn’t do any conversion. It now shows a price paid in CDN$ and it is on the Canadian side of my account, but the shares were purchased on the US market. I assume the price paid shown in CDN$ factors in the currency exchange cost they charged me? When time to sell, am I better off selling VOO in USD on the US side of my account first and then Norbert Gambit the funds back in CDN? Thanks for your input!

    1. Thanks!

      Not sure what brokerage you’re using, but generally if you don’t have the required funds in the native currency of the transaction (USD) brokerages will just convert whatever funds you do have (CAD). When you sell your shares of VOO you should get USD, but I’d confirm with your brokerage first, and make sure your account can hold both USD and CAD directly.

  27. Great article however I’m confused on one thing. Why did you say VFV is unhedged? Since if you are a Canadian and you’re buying VFV you would buy it with Canadian dollars, so there is no currency exchange involved. So why mention that its unhedged? Do you mean its unhedged for Americans?

    1. You said , “a bet on VFV is a bet that the S&P 500 will go up and that the US dollar won’t weaken, whereas a bet on VSP is just a bet that the S&P 500 will go up.”

      Again I dont get that. Why do we have to worry about US dollar weakening after buying VFV, if we are Canadians buying VFV in Canadian dollars?

      1. Remember that in both cases we’re buying American companies that operate in USD. Whether we buy them in CAD or USD doesn’t really matter, we’re now exposed to the performance of the currency that the businesses we own operate in. With VFV, this currency risk is not hedged, with VSP it is.

        Imagine you buy a share for USD $100 and the exchange rate is 2 CAD:1 USD. You’ve invested CAD $200. A year goes by and the share is still worth USD $100, but the exchange rate falls to 1 CAD:1 USD. Your investment is worth the same in USD, but is now only worth CAD $100. The strengthening Canadian dollar hurt your investment.

  28. Thanks for this article, it’s so helpful! I have both an RRSP and a TFSA.

    I currently have $55k in my RRSP (66% VFV, 25% VCN and 9% VXC)and $15k in my TFSA (50% VFV, 25% VCN, 25% VO). I contribute $500/month to each of these accounts. Should I be looking at allocating/distributing my portfolio differently? What would you recommend?

    Also, at what point should I convert VFV to VOO within my RRSP to take advantage of tax savings?

    Thanks!

    1. Looks like you have a really solid portfolio in the works!

      Depending on your risk tolerance and time horizon, you could consider adding a bond ETF to your portfolio. XBB and VAB are popular options on the TSX. You could also consider merging your VFV/VO holdings into a simpler all-cap ETF like VUS.TSX or VTI.NYSE.

      Tax savings: as I write this VOO’s yield is only about 1.6%, meaning you’d save 0.24% annually on withholding taxes in an RRSP compared to VFV. That’s $240/year per $100,000 invested. You be the judge of when that’s worth it for you!

  29. Fantastic!

    Awesome article! Easy to read and understand. Like another poster, I would be a blog subscriber too, you definitley have a knack. I also appreciate that your audience is smart and thoughtful with their comments and that ity generates even more great content from you. I am now searching out more of your ‘material’ to catch up on! Keep it coming and Thank You!

  30. Hi, I hope all is well. I make under $50,000 per year, so haven’t contributed to an RRSP at this point. However, I would like to start adding US stocks and/or US ETFs to my portfolio in the most tax efficient way possible. Would it be worth saving up (say $10,000 or more) and then doing Norbert’s Gambit to buy US stocks and/or ETFs in an RRSP given my current income? Or would it make more sense to buy them in a non-registered account? Or should I just stick with the Canadian ETF that holds US stocks/ETFs? Thanks for your help!

    1. Definitely prioritize maxing out your RRSP and TFSA first if you’re saving for retirement! No sense going into a non-reg account if you have room in those two. As far as being tax efficient goes, it’s better to own US-listed stocks and ETFs in an RRSP, but the savings are quite minor and I wouldn’t stress about it if your portfolio is still on the small side. Don’t forget you can get exposure to US equities through Canadian-listed ETFs – for example VFV.TO tracks the S&P500 in Canadian dollars. Hope this is helpful, cheers!

  31. Hey PFC,

    Thank you very much for the info. I’m new to this and looking to invest in sp500. Currently have 15k in an mutual fund RSP and a high interest TFSA with 30k. I’m young so im looking long term with this. Would it be best opening an investment account with my bank or go with questrade? Also what route should I take to maximize tax benefits?

    Thanks in advance!!

    1. So “Tax Free Savings Account” is a bit of misnomer – it doesn’t have to be a savings account! If you’re young and in it for the long haul, definitely consider transferring your $30k TFSA into a portfolio of equities and bonds. You can open a TFSA with Questrade or your bank, I like Questrade though because of the free ETF purchases. For tax efficiency it’s best to own US listed securities in an RSP as opposed to a TFSA, but the savings are quite minimal (15% of dividends) so I wouldn’t stress too much about it at this point.

        1. Great question!

          The S&P 500 is almost universally considered a better benchmark for American large cap equities than the DJIA. The Dow only has 30 components, compared to 500 in the S&P, so it is much less diversified. The Dow is also a price weighted, as opposed to market cap weighted, which is really unusual and unintuitive. For your average investor the S&P 500 is definitely the way to go if you’re looking to invest in American large caps.

  32. I stumbled on this site while searching for “best S&P 500 index etf” for Canadians. Man, ain’t I impressed. Thank you for your great advice. I’ll come back often from now on.

  33. Amazing article! I am in the process of converting funds out of RRSP mutual funds to an RRSP (long term investment 20+ years) Questrade account. I am Canadian and all funds in CAD. This will be my long term retirement fund where I will be contributing every 2 weeks. For less headaches and no currency exchange fees, would it be better to just hold a CAD listed S&P500 like VFV? I am looking at about 100K to start, and $1000+ per month contributions. As well, any recommendations for my TFSA? Thanks a lot! Also, can you email me!? grubesic45@gmail.com Thanks!

    1. It’s definitely easier to just stick with Canadian dollars, even though there are tax advantages to buying an S&P500 ETF in USD in an RRSP.

      This is especially true if you’re contributing just $1,000/mo – Norbert’s Gambit won’t save you much with that amount, and it’ll be a headache going through the process every few weeks.

      What I’d recommend is buying VFV in Canadian dollars, and then when you’ve built a significant position in that ETF (say $100,000), convert to USD and buy a US equivalent, like IVV or VOO.

      You already have $100,000 which I think is worthwhile converting to USD. With that amount you’d save about $300/yr in withholding taxes – whether that’s worth the trouble for you is a personal judgment call.

  34. Is 4000 cad a good amount to convert to USD using Norberts gambit. Which of these ETFs are best for TFSA for buying in c onverted USD

    1. $4,000 is definitely enough to make it worthwhile!

      On Questrade you’ll pay $0 purchasing the ETF (use DLR.U.TO and DLR.TO), and $5 selling it. You’ll lose about $8 on the spread when you buy and sell, for a total cost of about $15. In comparison if you use the built-in currency conversion feature you’d pay about 2%, which is $80.

        1. The spread is the difference between what people are willing to sell for (the ask) and what people are willing to buy for (the bid). For example, if I’m selling shares for $10.05 and you’re willing to buy them for only $10.00, the spread is $0.05. Stocks with high liquidity have a low spread, and stocks with low liquidity have a high spread.

          In the case of DLR.U and DLR, which are used for Norbert’s Gambit, the spread is usually a few cents. If you buy for the ask price or sell for the bid price you are “crossing the spread,” meaning you are overpaying by a couple cents a share for the convenience of fulfilling your order immediately. The money you lose on the spread can be reduced by using a limit order rather than a market order, and avoiding crossing the spread.

  35. Great info. I see that reference has been made to both DLR.TO and journal over to DLR.U.TO as well as ZSP.TO and journal to ZSP.U.TO . Is there a difference between them? My ultimate goal is convert over 100K CAN to US with as little cost as possible. The 1.5% to 2% that Questrade is going to charge sounds a bit steep.

    1. To keep things simple I’d recommend sticking to the DLR/DLR.U pair. You should be able to bring your currency conversion fees down to less than 0.5% using this method, depending on how much currency you’re converting at a time.

  36. Your article is terrific! I’ve been thinking of buying either VFV or XAW in my RRSP and non-registered accounts. I thought XAW would give me better diversification across world markets vs just the USA with VFV. I would appreciate your comments and suggestions. Thanks!!
    PS.. Do you have a regular Blog we can subscribe to? (as you have a talent of explaining confusing financial topics very clearly).

    1. VFV and XAW are both great funds. Make sure you pick up some exposure to Canadian markets with an ETF like XIC or VCN too.

      In an RRSP there are tax advantages to owning US equity funds that are listed on American exchanges. Check out this article for more details – you’ll want to read up on the impact of US withholding taxes on ETFs.

      Thanks for your comment! As far as new blog posts I only get the chance to work on this site when I can find some free time, but you’re welcome to bookmark my ‘articles’ page to look for new posts.

  37. Excellent Article, but a Possible Error?

    Great article, but I think you made a mistake in your two bullet conclusion.
    In your first bullet, I think you meant to say NON-Registered Accounts…(will ALWAYS pay withholding tax…)

    1. Hi and thanks for your thoughtful comment!

      Actually the original statement is correct – in a registered account, you will always pay the withholding taxes if the American securities are wrapped in a Canadian listed ETF. This is why investors should consider buying American-listed ETFs in an RRSP, so that this tax can be recovered.

  38. great article thanks a lot. what do you think about XUU for investing Long term (20+ years) as apposed to vfv which is more expensive per share? thanks.

    1. XUU is a great choice for exposure to US equities, and it’s actually one of my core holdings. It’s very similar to an S&P500 ETF, like VFV, but it has exposure to small and medium cap American companies too. About 85% of XUU is comprised of the S&P500, the remainder is split between the small and med caps.

      The price per share shouldn’t deter you from an investment. The number of shares you own is basically irrelevant, what’s important is how much money you have invested and how much you continue to contribute over time.

      Hope this helps, thanks for your comment!

  39. Hey there, this was a really helpful article as well as your article on Norbert’s Gambit. I am currently in the process of moving around $100,000 in an RRSP account to and RRSP account with Questrade.
    Based on what your suggesting, considering I am wanting to purchase an ETF for a long term holding (30 yrs or so) and continue purchasing every two weeks going forward. I was strongly considering VOO for it’s low expense ratio until I came across your article. Would you recommend using Norbert’s Gambit in the method you describe to purchase VOO on an ongoing basis and I am simply delayed by a few days every time I need to purchase more shares bi-weekly, or do you think that the VFV.CA would be a better bet?

    1. Hey, thanks for the feedback!

      I’d make VOO your core holding for the tax benefits, but rather than going through Norbert’s Gambit every two weeks, I’d buy VFV.CA with new contributions. Then, whenever you’ve built up a significant investment in VFV.CA, convert it to VOO. You could do this once or twice a year and you’d get most of the tax benefits with almost none of the headache.

      Another benefit to this approach is that Norbert’s Gambit is more cost effective when you’re converting larger sums. Norbert’s Gambit won’t be cheap if you’re only converting a few hundred dollars at a time.

      If you’re investing for the long term, you’ll also want to consider investing in bonds and international equities beyond just the S&P500. There’s a lot of great resources out there for reading up on this, but I recommend starting with Canadian Couch Potato.

        1. You’ll have to sell VFV for CAD, convert the CAD to USD, and buy VOO with USD.

          Unfortunately there’s no direct way of converting the two funds.

  40. Shant Mardirossiaan

    Thanks for the article. How would you invest long term within your RRSP in Canada. Would VSP.CA be my best option?

    1. In an RRSP there’s tax benefits to owning American-listed versions of S&P500 ETFs, so I’d consider VOO or IVV instead of VSP.CA.

      In terms of investing long term, you’ll want to consider investing in domestic and international equities beyond just the S&P500, and whether you want to invest in bonds. If you’re looking to build a passive, diversified portfolio I recommend starting with Canadian Couch Potato, there’s a lot of great info there.

  41. Great post! I own VFV in my TSFA and RESP, but would it then be wise to own VOO (using Norbert’s Gambit) for my non-reg account as the tax credits would offset the currency change?

    1. Thank you for the feedback!

      Generally it’s a good idea to take advantage of the tax savings in a non-registered account. The all-in cost of converting currencies with Norbert’s Gambit is very low, and afterwards you benefit from the tax savings year after year.

      What I’d recommend is buying ZSP.TO, which tracks the S&P500, and journaling it over to ZSP.U.TO, the USD-denominated version of the fund. You can then sell ZSP.U.TO and buy VOO with the proceeds. This way you can participate in the market while you wait for your brokerage to journal the shares.

  42. I don’t even know how I ended up here, but I thought this post was great. I do not know who you are but certainly you’re going to a famous blogger if you aren’t already 😉 Cheers!

  43. Sorry if I misunderstand : HXS seems to have far and away the largest combined fee if (MER + swap). So you’re implying that, in order for HXS to be the best choice in Cdn dollars, the tax savings would have to be greater than the fees. Is it that simple ?
    Thanks

    1. Hey RP,

      HXS has a management fee (MER) of 0.10%, and a swap fee of “no more than 0.30%.” So the total fees come out to a maximum of 0.40%.

      If you’re trading in an account where foreign withholding taxes aren’t recoverable, for example in a TFSA, then you’ll lose 15% of your dividends to the IRS. If the S&P500 is yielding 2%, that means you’re losing 0.30% to taxes.

      Investing in HXS allows you to avoid these taxes through their swap agreement. The question becomes whether the tax savings are big enough to justify the additional swap fee, and this will largely depend on the current yield of the index. In this example, you’re saving 0.30% in taxes and paying 0.30% for the swap fee, so you break even.

      Another benefit of HXS, I think I mentioned in the article, is that you can realize your capital gains strategically to lower your tax obligations in a margin or cash account. While you can do this with any other ETF as well, you will also have to claim the dividends as income each year, which may be disadvantageous depending on your situation.

      Hope this helps!

        1. Nope, the exact opposite! In a TFSA you’ll lose the withholding tax no matter what, so may as well buy a Canadian listed ETF. In an RRSP you will not pay a withholding tax if the ETF is US listed, but you will it it’s Canadian listed.

  44. Thanks for the great info. I would like to buy one of these in my TFSA account with no access to US dollars. What should I pick?

    1. VFV.CA is the best unhedged option, VSP.CA is the best hedged option. If you have a long time horizon I’d go with the unhedged version!

  45. Great write-up. Thanks! In summary for those with a RESP account with no access to US dollars. Withholding tax would apply and it is ineligibile for foreign tax credit correct? What would be my best bet in this case?

    1. Correct – withholding taxes are lost in an RESP, and there’s no mechanism for getting them back with tax credits. This means the only savings you’d get from buying a US listed ETF would come from a very small difference in management fees, which probably wouldn’t be enough to make up for currency conversion fees. So your best bet is either VSP.TO (currency hedged) or VFV.TO (unhedged). There’s really no definitive answer here, but I wouldn’t lose sleep over it regardless of which ETF you chose.

      1. It really is a great informative article!!

        Bottom Line:

        No access to US Funds

        Which fund do you recommend for a TFSA, RESP and a RRSP.

        Just want to get my money in if the S&P continues it’s slide.

        1. Currency hedged – VSP.CA
          Unhedged – VFV.CA

          If you think the US dollar is going to strengthen against the Canadian dollar you should buy the unhedged option. The Canadian dollar is very weak at the moment, but it’s impossible to say if it’ll continue to slide.

  46. If using Norbert’s gambit, would you suggest journalling over directly (e.g. VFV to IVV) or journal over a more stable fund (e.g. DLR. TO to DLR.U.TO), and then sell this to buy IVV?

    1. Hi Jackie,

      Unfortunately, most ETFs can’t be journaled between exchanges. Even though VFV and IVV have the same holdings they don’t have the same ticker, so it won’t work. There would need to be a VFV.U.TO or a VFV.US for it to work.

      Your safest bet is to use DLR.TO and DLR.U.TO. The only downside here is that you won’t be participating in the market for a couple days while you wait for the trades to settle.

      A second option is to journal over a cross-listed equity you already own, sell it for USD, then immediately buy back your position on the TSX. The major banks and other large Canadian companies like Bell and Enbridge are all cross-listed.

      Hope this helps!

      1. When you said, “then immediately buy back your position on the TSX”? Did you actually mean to buy back on the NYSE instead?

        There is a risk of doing it that way because the price could drop after you journaled. It happened to me.

        1. It would depend if you’re trying to get USD or CAD in the end. For example, if you have CAD and shares of TD.TO, you could journal TD.TO to TD.NYSE, sell the shares for USD, then rebuy TD.TO with your CAD. Afterwards you’d have USD and your original shares of TD.TO.

          But you’re absolutely correct the price could change while you’re buying and selling shares on different exchanges. This is why most people stick to DLR/DLR.U for Norbert’s Gambit.

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