Daily Stock Market Reports

VFV vs. VOO: Should Canadians Buy CAD- or USD-Listed S&P 500 ETFs?

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Welcome to a series where I break down and compare some of the most popular exchange-traded funds (ETFs) available to Canadian investors!

The benchmark S&P 500 Index is down over 11% 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, Vanguard 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 Vanguard S&P 500 Index ETF (TSX:VFV) and Vanguard S&P 500 Index ETF (NYSE:VOO). Which one is the better option? Keep reading to find out.

VFV vs. VOO: 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.

VFV has an MER of 0.09% compared to VOO at 0.03%. Both are very small, and the difference comes out to around $6 annually for a $10,000 portfolio. Still, VFV is three times as expensive as VOO, which can make a difference when held for the long term.

VFV vs. VOO: Holdings

Both VFV and VOO track the S&P 500 Index, which is comprised of the largest 500 companies listed on U.S. exchanges, diversified across various sectors like technology, health care, financials, communications, consumer staples, consumer discretionary, industrial, and energy. The index is widely seen as a barometre for overall U.S. stock market performance.

Both ETFs therefore hold the same underlying stocks, but in different ways. VOO elects to actually purchase all 500 of the index’s stocks in their corresponding proportions. VFV simply holds VOO as a “wrapper.” The structure doesn’t make a discernible difference in terms of performance, but it’s good to understand.

VFV vs. VOO: Tax efficiency

Holding VOO in an RRSP provides you with tax efficiency benefits over VFV. Normally, U.S. stocks and ETFs incur a 15% tax on dividends. For example, VOO’s yield of 1.43% would be reduced to around 1.24%. However, this does not occur in an RRSP because of a tax treaty with the U.S., allowing you to maximize gains.

VFV 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, VOO incurs an additional drag on the dividends paid out, which can reduce your total return over time.

VFV vs. VOO: Currency hedging

When you buy a Canadian ETF like VFV that holds an U.S. ETF like VOO, the difference between the CAD-USD pair can also affect the value of the Canadian ETF beyond the price movement of the underlying stocks.

ETFs that are unhedged accept this phenomenon. 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.

This has been the case with VFV, with the rising U.S. dollar causing its return to beat VOO over the last decade in terms of total returns. This is misleading, as an investor who invested in VOO could have sold and converted to CAD for roughly the same return.

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 VOO. Otherwise, if you’re investing in your TFSA or taxable account and want an easy way of buying the S&P 500, VFV is the better buy.

Read More: VFV vs. VOO: Should Canadians Buy CAD- or USD-Listed S&P 500 ETFs?

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