I have always had a soft spot for the S&P 500 Index, and by extension the exchange-traded funds (ETFs) that track it.
It is one of the most difficult benchmarks for active managers to beat over long periods of time. Even better, the passive ETFs tracking it typically charge very low fees.
Competition among ETF providers has only strengthened that advantage. With so many firms offering similar products, management fees have steadily declined and may continue to fall over time.
Among the available options, Vanguard’s S&P 500 ETFs remain some of the most popular.
For Canadian investors, however, there are actually three different versions worth considering. Each one comes with its own trade-offs involving currency exposure, tax treatment, and conversion costs.
If you are a Canadian investor exploring Vanguard’s S&P 500 ETFs, here is how the main options compare.
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The VFV option
The Vanguard S&P 500 Index ETF (TSX:VFV) is the most common starting point for Canadian investors.
It is extremely popular, with roughly $28.3 billion in assets under management, and it charges a relatively low 0.09% expense ratio.
One important characteristic is that the ETF is not currency hedged. While the underlying companies trade in U.S. dollars, the ETF itself trades in Canadian dollars. As a result, exchange rate movements can affect performance, in addition to the movements of the index.
If the U.S. dollar strengthens relative to the Canadian dollar, VFV tends to benefit. If the Canadian dollar strengthens, the opposite can occur.
Another detail worth noting is the dividend yield. The ETF’s trailing 12-month yield of about 0.92% already reflects the 15% foreign withholding tax applied to dividends from U.S. companies.
That tax cannot be avoided when holding VFV, but the ETF remains attractive for investors who prefer not to convert Canadian dollars into U.S. dollars.
The VSP option
For investors who want to eliminate currency fluctuations, there is the Vanguard S&P 500 Index ETF CAD-hedged (TSX:VSP).
This ETF holds the exact same companies as VFV and charges the same 0.09% management expense ratio. The difference is that VSP includes a currency hedging strategy designed to neutralize movements between the U.S. dollar and the Canadian dollar.
In practical terms, this means the ETF’s performance should more closely mirror the S&P 500 index itself without the additional impact of exchange rates.
That also creates a trade-off. When the U.S. dollar rises, VFV may outperform because of the currency tailwind. When the Canadian dollar strengthens, VSP may hold up better because the hedging removes that headwind.
Despite the hedging, the dividend tax treatment remains the same. Like VFV, VSP still faces the 15% foreign withholding tax on U.S. dividends, which results in a similar trailing yield of about 0.92%.
The VOO option
Another alternative is to buy the Vanguard S&P 500 ETF (NYSEMKT:VOO) directly on a U.S. exchange.
This option comes with a few additional considerations for Canadian investors.
First, you must convert Canadian dollars into U.S. dollars to purchase the ETF. Depending on the brokerage platform you use, currency conversion can carry fees that approach 1.5% or more. Platforms such as Interactive Brokers tend to offer much lower costs.
Second, avoiding the 15% foreign withholding tax requires holding the ETF in a Registered Retirement Savings Plan (RRSP). The United States recognizes this account under the tax treaty between the two countries, allowing dividends to be paid without withholding.
For investors who can overcome those two hurdles, VOO has one major advantage: cost. The ETF charges an expense ratio of just 0.03%, which is roughly one-third of the fee charged by the Canadian-listed Vanguard options.
