S&P500 ETF's

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Feb 24th, 2018 6:49 pm

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Feb 11th, 2018 6:07 pm

Guest4738483 [OP]: Newbie; Jul 24, 2007; 15 posts; 31 upvotes; Vancouver

Feb 11th, 2018 6:07 pm

S&P500 ETF's

Hi folks,

I'm looking to add an S&P500 ETF to my portfolio. I've narrowed my search down to two Vanguard ETF's: VSP (Vanguard S&P 500 Index ETF CAD-hedged) and VFV (Vanguard S&P 500 Index ETF unhedged). I looked at Vanguard's website and it shows that VFV has total net assets of $1.446 billion while VSP only has net assets of $0.571 billion ($571 million), so clearly retail investors favour VFV. I looked at the performance over the past 5 years and VFV comes out ahead too because it is unhedged, so it benefitted from the drop in the Canadian dollar's value (relative to USD). Here is a chart of VFV, VSP, and the S&P500 index...

As you can see, VSP (the hedged ETF in green) tracks very closely to the actual S&P500 (blue line), but VFV (in red) has outperformed in the past 4 years because it benefitted from the Canadian dollar's drop against the USD which started around 2015. VFV would likely UNDERPERFORM if the Canadian dollar strengthens against the USD. Both etf's have the same MER.

I'm having a difficult time picking. Which one would you pick - hedged CAD or unhedged CAD and why? Also what is your favourite S&P500 ETF? Thanks!

Pete

22 replies

Feb 11th, 2018 7:39 pm

Guest37273939: Deal Addict; Jul 27, 2017; 2180 posts; 942 upvotes

Feb 11th, 2018 7:39 pm

interesting that VFV holdings are 100% of VOO

http://quote.morningstar.ca/quicktakes/ ... ture=en-CA

https://finance.yahoo.com/quote/VOO?p=VOO

There are other S&P500 ETF's out there, a couple for you to look at & compare

ZSP http://quote.morningstar.ca/QuickTakes/ ... ture=en-CA

XSP http://quote.morningstar.ca/quicktakes/ ... ture=en-CA

Feb 11th, 2018 7:49 pm

freilona: Deal Addict; Aug 4, 2014; 3418 posts; 3622 upvotes; Toronto, ON

Feb 11th, 2018 7:49 pm

Have VFV. It had the lowest MER when I started buying it - and didn’t want the hedged version (as you noticed, it’s not very popular

)

Feb 12th, 2018 1:33 am

Guest4738483 [OP]: Newbie; Jul 24, 2007; 15 posts; 31 upvotes; Vancouver

Feb 12th, 2018 1:33 am

Thanks for sharing freilona and porticoman. Yeah, I think I'll go with VFV and it has the lowest fee in the Canadian ETF market :-).

freilona wrote: ↑ Have VFV. It had the lowest MER when I started buying it - and didn’t want the hedged version (as you noticed, it’s not very popular )

+1

Feb 12th, 2018 9:57 pm

Thanh: Deal Addict; Oct 14, 2001; 1696 posts; 518 upvotes; GMA

Feb 12th, 2018 9:57 pm

Technically, XUU is slightly cheaper but it's a Total Market ETF instead of S&P500.

Feb 12th, 2018 11:00 pm

Deepwater: Deal Addict; Feb 1, 2012; 1596 posts; 2366 upvotes; Thunder Bay, ON

Feb 12th, 2018 11:00 pm

Since the underlying holdings are the same, the difference is hedging and currency fluctuations, so you should learn about those things.

Canadian Couch Potato has some good blog posts on hedging.
http://canadiancouchpotato.com/?s=hedge

I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.

Feb 13th, 2018 9:41 pm

sckor: Sr. Member; Jul 1, 2006; 744 posts; 558 upvotes

Feb 13th, 2018 9:41 pm

If you are in a non-RRSP account, you might also consider https://www.horizonsetfs.com/ETF/HXS - 0.10% MER, and built in DRIP via the nature of the swap based structure so it has no tax drag when purchased outside of an RRSP. Can also be purchased in $US (HXS.U) or $CAD (HXS) and can be journaled between the two currencies.

+1

Feb 18th, 2018 1:10 am

Guest4738483 [OP]: Newbie; Jul 24, 2007; 15 posts; 31 upvotes; Vancouver

Feb 18th, 2018 1:10 am

Thanks for sharing sckor. HXS has some intresting features, but it has a higher MER than VFV or VSP, which are both at 0.08%.

Feb 18th, 2018 7:25 am

mrtrump: Sr. Member; Oct 19, 2016; 650 posts; 205 upvotes; Toronto

Feb 18th, 2018 7:25 am

Interesting that XUU (ishares) charges less fee than VUN (vanguard) for the same etf while the VSP (vanguard CAD hedged) is similar to XUU in fee.

Thanh wrote: ↑ Technically, XUU is slightly cheaper but it's a Total Market ETF instead of S&P500.

Feb 18th, 2018 8:57 am

cmackie: Deal Addict; Aug 1, 2007; 1425 posts; 218 upvotes

Feb 18th, 2018 8:57 am

sckor wrote: ↑ If you are in a non-RRSP account, you might also consider https://www.horizonsetfs.com/ETF/HXS - 0.10% MER, and built in DRIP via the nature of the swap based structure so it has no tax drag when purchased outside of an RRSP. Can also be purchased in $US (HXS.U) or $CAD (HXS) and can be journaled between the two currencies.

HXS will also have a drag up to .3% due to swap fees that won't be taken into account in the MER. It's basically a wash with respect to savings on witholding taxes. The plus side is that there are no distributions so it benefits from compounding automatically.

Feb 21st, 2018 9:32 pm

sckor: Sr. Member; Jul 1, 2006; 744 posts; 558 upvotes

Feb 21st, 2018 9:32 pm

telemachus wrote: ↑ Thanks for sharing sckor. HXS has some intresting features, but it has a higher MER than VFV or VSP, which are both at 0.08%.

Yep - that's part of the reason I mentioned non-RRSP account (though at 0.02-0.05% additional expense unless we are talking a $2M portfolio, it isn't going to matter much).

The big win for non-RRSP accounts is no distributions so there are no concerns with foreign withholding taxes or ACB calculations. In addition, the built in DRIP for compounding is nice. If you are in an RRSP, then none of those features really matter. Though I'd still consider it for a TFSA since the foreign withholding taxes on the distributions from VFV or VSP will not be recoverable and that alone would likely more than make up for the minor MER differences.

Feb 21st, 2018 11:57 pm

Thalo: Deal Fanatic; Jul 1, 2007; 8492 posts; 1616 upvotes

Feb 21st, 2018 11:57 pm

What nobody's mentioned yet, where it comes to hedging: The CAD is a risk currency, the USD is a safety currency. When the global markets get scared, they flee to the USD and it goes up relative to the CAD. When the economy's doing well and markets are taking more risk, the USD goes down.

This is freakin' awesome for Canadian investors, as it's automatic built in risk management, and it's FREE! I don't know why someone in their right mind would want to buy the hedged version UNLESS we were at parity today... maybe.

Look what holding an unhedged U.S. equity ETF did back in 2008... The S&P500 was down 50-some percent, but the CAD also went down from parity to around 85 cents. A Canadian investing in U.S. only lost around 30-something percent.

Money Smarts Blog wrote: ↑I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.

+1

Feb 22nd, 2018 12:07 am

wm009: Deal Addict; Dec 26, 2010; 1735 posts; 771 upvotes; Calgary

Feb 22nd, 2018 12:07 am

Thanh wrote: ↑ Technically, XUU is slightly cheaper but it's a Total Market ETF instead of S&P500.

Thank you. Over the last few years I haven’t been paying attention that much to products, but it’s nice to see something that is cheap and a broader index of the US market.

Indexer, non-yield chasing, low cost, broad based, as simple as possible investor.

Feb 22nd, 2018 1:50 pm

amal1595: Jr. Member; Feb 8, 2018; 126 posts; 41 upvotes

Feb 22nd, 2018 1:50 pm

Look what holding an unhedged U.S. equity ETF did back in 2008... The S&P500 was down 50-some percent, but the CAD also went down from parity to around 85 cents. A Canadian investing in U.S. only lost around 30-something percent.

Market has been doing well lately, still 1CAD = 0.7-0.8 USD
CAD follows oil prices.

Feb 22nd, 2018 2:08 pm

divx: Deal Expert; Oct 26, 2003; 35162 posts; 4319 upvotes; Winnipeg

Feb 22nd, 2018 2:08 pm

Thalo wrote: ↑ What nobody's mentioned yet, where it comes to hedging: The CAD is a risk currency, the USD is a safety currency. When the global markets get scared, they flee to the USD and it goes up relative to the CAD. When the economy's doing well and markets are taking more risk, the USD goes down.

This is freakin' awesome for Canadian investors, as it's automatic built in risk management, and it's FREE! I don't know why someone in their right mind would want to buy the hedged version UNLESS we were at parity today... maybe.

Look what holding an unhedged U.S. equity ETF did back in 2008... The S&P500 was down 50-some percent, but the CAD also went down from parity to around 85 cents. A Canadian investing in U.S. only lost around 30-something percent.

you mean we should be buying VFV today and not VSP? the likely hood of CDN go up against the USD is higher than going down. if you buy VFV, do you have to convert CAD into USD to buy? Or does it buy using CAD value straight up but the shares are traded in USD?

Feb 22nd, 2018 4:18 pm

wm009: Deal Addict; Dec 26, 2010; 1735 posts; 771 upvotes; Calgary

Feb 22nd, 2018 4:18 pm

divx wrote: ↑ you mean we should be buying VFV today and not VSP? the likely hood of CDN go up against the USD is higher than going down. if you buy VFV, do you have to convert CAD into USD to buy? Or does it buy using CAD value straight up but the shares are traded in USD?

VFV is Canadian dollars.

I think the whole currency thing gets in people's ways. VFV ($CAD) or VOO ($US). It's all the same thing. One is measured in kg (CAD) and the other is in pounds (US). The product, the actual securities are the same and you live in Canada, so there's always currency issues with respect to Canada. It's the reality of buying in the US.

It's this lack of understanding that leads people to hedging products. Hedging products just a bastardized version of the S&P500, where an 'active' strategy is employed to determine something that is less currency risky. It's a game and a game that takes you further away from passive indexes.

If one is truly concerned about this currency issue, instead of buying $10,000 hedged, buy $8000 unhedged and put $2000 into fixed income because that's how your risk tolerance should be controlled.

Indexer, non-yield chasing, low cost, broad based, as simple as possible investor.

+2

Feb 22nd, 2018 10:12 pm

Thalo: Deal Fanatic; Jul 1, 2007; 8492 posts; 1616 upvotes

Feb 22nd, 2018 10:12 pm

I might have made a mistake in my previous post. If the CAD is at parity, then you DON'T want to hedge, if it's at 60-something cents, then DO hedge.

At 80ish cents it can go either way. Again, if the world markets go from risk-on to risk-off, then it's likely the USD will rise and not being hedged will reduce your losses.

Money Smarts Blog wrote: ↑I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.

+1

Feb 23rd, 2018 2:02 am

RCML27: Deal Addict; May 28, 2007; 1212 posts; 477 upvotes

Feb 23rd, 2018 2:02 am

wm009 wrote: ↑ VFV is Canadian dollars.

I think the whole currency thing gets in people's ways. VFV ($CAD) or VOO ($US). It's all the same thing. One is measured in kg (CAD) and the other is in pounds (US). The product, the actual securities are the same and you live in Canada, so there's always currency issues with respect to Canada. It's the reality of buying in the US.

It's this lack of understanding that leads people to hedging products. Hedging products just a bastardized version of the S&P500, where an 'active' strategy is employed to determine something that is less currency risky. It's a game and a game that takes you further away from passive indexes.

If one is truly concerned about this currency issue, instead of buying $10,000 hedged, buy $8000 unhedged and put $2000 into fixed income because that's how your risk tolerance should be controlled.

How would VFV be treated in an RRSP? With VOO, there would be no U.S. withholding taxes on the dividends because the ETF is U.S. based. But would the dividends from VFV be treated the same or would withholding taxes be taken? I take it that in a TFSA, it's different, and U.S. withholding taxes would be applied.

I've also noticed that the MER on the Canadian Vanguard ETFs are double that of their U.S. counterparts. VOO has an MER of 0.04%, but VFV has an MER of 0.08%. Why is that? The exchange rate is not 100%. Or is this just gouging the Canadian consumer?

Feb 24th, 2018 10:55 am

cdgnfr: Jr. Member; Jan 13, 2008; 110 posts; 57 upvotes

Feb 24th, 2018 10:55 am

RCML27 wrote: ↑ How would VFV be treated in an RRSP? With VOO, there would be no U.S. withholding taxes on the dividends because the ETF is U.S. based. But would the dividends from VFV be treated the same or would withholding taxes be taken? I take it that in a TFSA, it's different, and U.S. withholding taxes would be applied.

I've also noticed that the MER on the Canadian Vanguard ETFs are double that of their U.S. counterparts. VOO has an MER of 0.04%, but VFV has an MER of 0.08%. Why is that? The exchange rate is not 100%. Or is this just gouging the Canadian consumer?

VFV (dividends) are taxed inside an RRSP
The higher MER is just gouging but .08 is still pretty competitive.

+1

Feb 24th, 2018 1:51 pm

RCML27: Deal Addict; May 28, 2007; 1212 posts; 477 upvotes

Feb 24th, 2018 1:51 pm

cdgnfr wrote: ↑ VFV (dividends) are taxed inside an RRSP
The higher MER is just gouging but .08 is still pretty competitive.

Thanks cdgnfr.

Is there a way to put Canadian based S+P 500 index ETFs into the RRSP without having the withholding tax taken off? If the only way to do it is by buying U.S. based products, is paying the exchange rate when our dollar is low worth it? Thanks.

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