Canadian investors aren’t just big buyers of U.S.-traded stocks; some U.S.-traded ETFs have also caught on despite having to execute sometimes painful currency swaps. Of course, trading in your loonies for greenbacks has become somewhat less painful in recent months, thanks to the erosion of the U.S. dollar. In any case, I think U.S. ETFs can make sense for Canadian investors who either aren’t satisfied with the TSX-traded slate of ETF products or just want to have U.S. dollars, either in an RRSP or a non-registered account.
In recent years, the number of ETFs on the TSX Index has surged. And while it’s incredibly convenient to go for a TSX-traded ETF, one that might invest in U.S. markets, I’d argue that there is one shortcoming of going for Canadian ETFs that have comparable U.S.-traded rivals: the expense ratio gap.
In short, you’ll pay for the convenience of not having to go through the CAD-to-USD exchange. If we’re talking about considerable sums of cash to invest (let’s say $25,000 or more in an S&P 500 fund or a gold bullion ETF), I’d argue it makes sense for a Canadian to go with a U.S.-traded ETF.
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U.S. ETFs deserve a spot in a Canadian portfolio, too!
Whether we’re talking about a run-of-the-mill S&P 500 ETF, like the Vanguard S&P 500 ETF (NYSEMKT: VOO), which is popular among Americans and Canadians, there are a few basis points of expense ratio to save each year. Not to mention tax benefits if we’re talking about an RRSP.
As always, U.S. ETFs can be the right tool for the job. If you’re a cost optimizer and can implement Norbert’s Gambit to make the conversion pain-free (a few extra steps but hundreds, maybe even thousands saved), I’d argue there still is a strong case for U.S.-traded ETFs, especially if you’re with a broker that doesn’t charge commissions on said popular U.S. ETFs!
So, in short, TSX-traded ETFs are great. They’re convenient. But they may not offer the right mix of stocks you’re looking for, since there’s a relatively limited selection compared to the U.S. And, on average, you’ll pay more in fees in any given year for the convenience.
So, my argument is that if your brokerage allows for Norbert’s Gambit and you don’t mind holding ample U.S. dollars, there’s little reason not to consider the popular U.S.-traded ETFs as well. In fact, I’d argue that it makes more sense to go for U.S. comparable ETFs for the lower fees if you’re a big investor where every basis point of expense ratio matters, especially over many years, if not decades.
The SMH and GLMD are must-knows!
Aside from the Vanguard S&P 500 ETF, which is a popular RRSP staple, at least in my view, the VanEck Semiconductor ETF (NASDAQ: SMH) and the SPDR Gold MiniShares (NYSEMKT: GLDM) are must-know U.S.-traded ETFs worth exploring.
First, there really isn’t a comparable semiconductor ETF on the TSX. And even if there was, it’d go for a rich management expense ratio. Not to mention liquidity wouldn’t be as high as the SMH, which is one of the best semi-industry ETFs on the planet. Over the past year, the semi-ETF has gained close to 60%. Over the past five years, that’s 221%. As one of the hottest long-term ways to play the AI boom, the SMH is a standout U.S. ETF Canadians might consider.
If you’re in risk-off mode, I’d consider GLDM, a gold ETF that happens to have TSX-traded rivals. But what’s the kicker? The GLDM’s expense ratio is miles lower!
We’re talking about a 0.1% expense ratio, which is huge, especially when you compare it to most other gold ETFs out there that cost a 0.4% management expense ratio. The 0.30% in savings is massive and, in my view, is worth making the jump into the U.S. exchanges!
Bottom line
Whether you seek unique exposure or lower fees, the U.S.-traded ETFs can make a ton of sense to own as a Canadian. Sure, it might not be as convenient, especially if you can’t implement Norbert’s Gambit to save on conversion fees, but it’s worth consideration for the sake of diversification and long-term cost savings!
