Welcome to a series where I break down and compare some of the most popular exchange-traded funds (ETFs) available to Canadian investors!
The mega-cap tech-heavy NASDAQ 100 Index is down over 23% year to date as a result of rising interest rates and high market volatility. The current correction could be a great buying opportunity though. Thankfully, both BlackRock and Invesco provides a set of low-cost, high-liquidity ETFs that offer exposure to the S&P 500 in both CAD and USD.
The two tickers up for consideration today are iShares Nasdaq 100 Hedged to CAD Index ETF (TSX: XQQ) and Invesco QQQ Trust (NYSE:QQQ). Which one is the better option? Keep reading to find out.
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XQQ vs. QQQ: Fees
The fee charged by an ETF is expressed as the management expense ratio (MER). This is the percentage that is deducted from the ETF’s net asset value (NAV) over time and is calculated on an annual basis. For example, an MER of 0.50% means that for every $10,000 invested, the ETF charges a fee of $50 annually.
XQQ has an MER of 0.39% compared to QQQ at 0.20%. The difference comes out to around $19 annually for a $10,000 portfolio. Still, XQQ is nearly two times as expensive as QQQ, which can make a big difference when held for the long term.
XQQ vs. QQQ: Holdings
Both XQQ and QQQ track the NASDAQ 100 Index, which is comprised of the largest 100 non-financial companies listed on the NASDAQ exchange. The index is widely seen as a barometre for overall U.S. mega cap and tech sector performance. Both ETFs buy and hold the 100 stocks that comprise the index in their proper proportions and make adjustments accordingly as the index changes.
XQQ vs. QQQ: Tax efficiency
Holding QQQ in an RRSP provides you with tax-efficiency benefits over XQQ. Normally, U.S. stocks and ETFs incur a 15% tax on dividends. For example, QQQ’s yield of 0.55% would be reduced to around 0.47%. However, this does not occur in an RRSP because of a tax treaty with the U.S., allowing you to maximize gains.
XQQ does suffer from a 15% foreign withholding tax on the dividends as the ETF is a CAD wrapper holding its U.S. counterpart. For this reason, QQQ incurs an additional drag on the dividends paid out, which can reduce your total return over time. However, because QQQ pays such a small dividend, this should not be a big deal, unless your account is very large
XQQ vs. QQQ: Currency hedging
When you buy an non-currency hedged Canadian ETF that holds an U.S. ETF, the difference between the CAD-USD pair can also affect the value of the Canadian ETF beyond the price movement of the underlying stocks.
What that means is if the U.S. dollar appreciates, the ETF will gain additional value. Conversely, if the Canadian dollar appreciates, the ETF will lose additional value. This introduces extra volatility that could affect your overall return, which some investors may not want.
XQQ uses currency hedging in its construction. Theoretically, this means that XQQ’s value will not be affected by fluctuations between the CAD-USD. In practice, the imperfect way the currency futures contracts are rolled forwards introduces tracking error, which results in a drag on performance compared to QQQ.
The Foolish takeaway
If you are comfortable with using Norbert’s Gambit to convert CAD to USD for cheap (which I covered earlier with a how-to guide) and are investing in your Registered Retirement Savings Plan (RRSP), you can save significantly by using a U.S.-denominated ETF like QQQ. Otherwise, if you’re investing in your TFSA or taxable account and want an easy way of buying the NASDAQ 100, XQQ is the better buy.
