Opinion on investment?

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speer
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Opinion on investment?

Post by speer »

Looking to invest 15,000 CAD in a ETF Vanguard S&P 500 [VFV] or Total US Market [VUN].

VFV has a 0.08% MER and VUN has 0.16%.
Both are unhedged.

Looking for medium - long-term growth (5-20 years+). Although this could change if I decide to move to the states.

I am leaning towards the S&P 500 because the lower MER and it still covers 80% of the stock market.
Ive been reading unhedged out performs hedged in the long run due to hedge funds suffering tracking errors.

Any advice on this investment or suggestions?
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AltaRed
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Re: Opinion on investment?

Post by AltaRed »

VFV looks like the better deal to me for 8bp better in costs. The S&P500 really does represent the US market. Note that if this is planned to be in a registered account, you will lose the 15% withholding tax on income within the ETF. To avoid that, you would need to invest in a US domciled equivalent such as VTI instead.
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speer
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Re: Opinion on investment?

Post by speer »

Completely forgot. I will be investing this in a taxable account and will be using the 15% withholding tax to offset taxes owed on my Canadian taxes.

I dont plan to purchase American version unless miraculously the CAD matches the USD
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Re: Opinion on investment?

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speer wrote:I dont plan to purchase American version unless miraculously the CAD matches the USD
It actually makes no different whatsover where the loonie is with respect to a decision to use CAD ETFs or USD ETFs... other than the forex conversion costs...which can be overcome with Norbert's Gambit. With both VFV and VUN, you are already buying US stocks in USD with CAD. You just don't see the conversion. That said, buying VFV or VUN is perfectly legit and what most people would do to avoid forex conversions.
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Re: Opinion on investment?

Post by speer »

For example, if I convert all my money to USD and hold it in the S&P 500 USD ETF for 5years and over those 5 years CAD grew to on par with the USD, would the divergence in performance between the USD ETF and CAD ETF be the exact amount the CAD has gained in strength? In its current footing of 1 cad equaling 0.77 USD, the CAD ETF would under perform by 33% over 5 years?
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AltaRed
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Re: Opinion on investment?

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Yes indeed...using your terminology. Said a different way, the USD ETF and CAD ETF perform the same as long as you always look at both...on the same currency terms. IOW, if you look at the CAD ETF in CAD terms, you must mentally re-calculate the USD ETF in CAD terms too...to compare apples with apples.

There was a time 15-20 years ago when the CAD appreciated from about 63 cents to about 1.10 relative to the greenback. Those who held US domiciled investments in USD sure didn't get excited about their US equity returns when they converted them to CAD equivalent. Indeed, Canadians made virtually no money on their USD investments for the better part of a decade.
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Re: Opinion on investment?

Post by speer »

What would you do if you were in my shoes? Go for unhedged? Whats your personal portfolio look like?

One thing id like if converting my money and buying US ETF's is Id save myself from PFIC but I plan to work in Canada for a bit and as I put % of my income in to the ETF each time I dont think the small amounts would equate good with the conversion.
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Re: Opinion on investment?

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I've never hedged. 1) Hedging costs real money. 2) Currency cycles come and go over 20-40 years as a zero sum game. 3) Diversification of currency is a good thing as it help protects one against a long downward spiral/collapse in the economy of one's home country. Otherwise, why invest in the USA at all?
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Re: Opinion on investment?

Post by always_learning »

Hi, speer. Welcome to FWF. I'm a US-only citizen residing in Canada. I have paid taxes to both countries for decades.

Like you, I want to be globally diversified. While somewhat inconvenient, it will reduce the volatility of your overall portfolio. I think it's worth doing.

Because VUN and VFV are PFICs, and the PFIC paperwork is such a nightmare, I definitely advise you against buying a Canadian-domiciled mutual fund or ETF like VUN or VFV.

Bogleheads is a high-quality source of investing information for US citizens. Have a look at their page on Taxation of a US person living abroad.

Note their words regarding PFIC reporting: "extremely time consuming task." I bet that was edited from the writer's original: "absolute goddamn unmitigated ****ing nightmare."

Yes, it's inconvenient to have those distribution dribs and drabs in US$ rather than C$. Yes, it's also inconvenient to have to pay currency transaction costs especially when, as in your case, you will be making periodic buys rather than a single lump sum purchase.

However, those inconveniences are trivial compared to PFIC reporting. (I can not speak of this firsthand: I have never done the PFIC paperwork. However, the view expressed in the Bogleheads article is widely held.)

My advice would be to use Norbert's Gambit to convert your C$ currency to US$ and then buy a US-based ETF like VTI (MER 0.05%). I find Norbert's Gambit makes the currency transactions pretty cheap, actually.

AltaRed is right that where an ETF is domiciled is irrelevant to how currency fluctuations will affect the value of your investment. Currency fluctuation should not be a factor in your decision to buy Canadian vs. Us domiciled.

Incidentally, as a US citizen, you need to think about your Canadian holdings, too. Canadian-domiciled mutual funds and ETFs are also PFICs. I'd stay away from them. To invest in Canadian stocks, I avoid Canadian-domiciled mutual funds and ETFs. I own individual Canadian stocks instead, because individual Canadian stocks are not PFICs. I've got my own strategy for gradually building up over time to mimic the S&P/TSX 60. Right now I own maybe 30 or so individual Canadian stocks. I try to match the industry % of the index with my portfolio.

I have found having to file in both countries makes my taxes rather complicated. Myself, I find it well worth the money to have my taxes done by someone with expertise filing returns to both countries. I would recommend that, at least for your first year filing US returns.

Feel free to ask any more questions.

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Re: Opinion on investment?

Post by ethanpurdy »

I realize I'm very late posting here but I have another question about cross border investing for dual citizens.

Many ETF providers are now including information necessary for the QEF election on 8621. This makes the tax treatment of these much more favorable. The reporting and filing issue is still there of course. Given this, does it make sense to still buy US domiciled ETFs like VTI or are purchasing Canadian listed ETFs now practically possible? Vanguard and iShares are providing PFIC forms for a good number of their ETFs.
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always_learning
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Re: Opinion on investment?

Post by always_learning »

ethanpurdy, thanks for the information that Vanguard and iShares Canada do provide the information necessary to allow US persons to choose the QEF election on a form 8621. I didn't know that.

To be perfectly honest, additional IRS paperwork scares me. Speaking only for myself, I know that my own approach (ind'l C stocks) works, and I'm leery of unintentionally filling out an IRS form incorrectly or of getting out-of-sync with respect to what the two countries think my cost basis is (with potential for double taxation (?)). That said, though, I'd love to hear if any other US persons have had a positive experience using Canadian-domiciled ETFs and filling out form 8621.

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Re: Opinion on investment?

Post by Peculiar_Investor »

The Bogleheads wiki has a new article that might be helpful, see Passive foreign investment company - Bogleheads. It covers some of the filing requirements and options.
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