hey guys it's Adrian here the Canadian in a T-shirt and today I'll be breaking down why
I don't invest in vfv and the danger of Canadian ETFs that hold U.S stocks vfv is one of the most
popular Canadian ETFs out there because it tracks the S P 500 the 500 largest companies
in the United States but it does come with some hidden fees and downsides that most Canadians
are not aware of instead I invest in voo the US dollar version of this ETF for two main reasons
one it's cheaper I pay less in management fees every year and two it's more tax efficient I'm
able to avoid that 15 withholding tax on U.S dividends which you can't do with a Canadian
ETF in this video I'm focusing on vfv versus vo to illustrate these points but the same applies
to any Canadian ETF that holds U.S stocks as always I include timestamps for each chapter
so feel free to skip ahead I've wanted to make this video for years because it's a question
that I I get asked all the time so I'm glad that's finally here don't get me wrong vfv is a fantastic
ETF I'm glad that it's so popular in Canada it's a far better way to invest in the US market than
a mutual fund but voo the US dollar version is even better and that extra value really
does make a difference over time both vfv and vo track the S P 500 the 500 largest companies
in the US so when you invest in these ETFs you're buying a little piece of Apple Microsoft Amazon
Visa Google Procter Gamble Tesla Etc both of these ETFs are owned by Vanguard and they have the same
portfolio so what's the difference voo is traded on the New York Stock Exchange in US dollars but
vfv is traded on the Toronto Stock Exchange in Canadian dollars and that's why vfv is so popular
with Canadians in fact if we look here on Blossom the social media app for Canadian investors I'll
include a link below we can see the most held stocks and you'll see see that vfv is the third
most popular investment with 2 350 holders that's 12 percent of all users meanwhile let's go to my
portfolio and scrolling through my Holdings you'll see vo which makes up two percent of my portfolio
clicking on voo you'll see that it only has 255 holders 10 times less popular than vfv among
Canadians but it's the exact same fund both vfv and vo hold the exact same companies and with the
same weightings in fact vfv is just a rapper of vo vo is the original it's the one that actually buys
those 500 stocks vfv which came out two years later doesn't buy those U.S stocks directly
it just buys shares of voo so you put money into vfv Vanguard takes your money charges higher fees
and then buys vo so what are you paying those extra fees for take out the middleman and buy
voo directly that's what I do so let's talk about the fees Vanguard literally invented the ETF and
they're famous for charging Rock Bottom management fees vlo is no exception with an incredible mer of
only 0.03 that's how much in fees you pay every year which is almost nothing there are only
a handful of ETFs with an mer lower than 0.03 now let's look at vfv anytime you're buying an
ETF in a different currency more work is required so they can charge you higher management fees for
the same product since via feed trades in Canadian dollars their mer is three times higher at 0.09
percent that's still super low and a fraction of the average mutual fund which can charge upwards
of 2.5 percent but the fact is with vfv you are paying three times the cost every year for the
same product so you're always going to be a little bit behind and I get it for small sums of money
0.03 compared to 0.09 percent doesn't sound like much but let's say you've been investing
for 10 years and you've built up a portfolio of 100 000 dollars tracking the US market with vlo
you're paying 0.03 or 30 a year in fees with vfv you're paying triple or 90 a year in fees that
really starts to add up the longer you invest and the larger your portfolio grows the bigger
impact these higher fees will have so keep that in mind since vfv and vo are passive funds they
have super low management fees but if we look at more specialized ETFs they have higher fees
and the Canadian versions are even worse Vig is the US dividend appreciation ETF which tracks
U.S companies with increasing dividends they still charge a very low mer of only 0.06 percent that's
great but the Canadian version vgg is five times more expensive with an mer of 0.3 percent that's
a five times markup in Annual fees for the same product and when it comes to ETFs an mer of 0.3
is no longer considered low it's mid-tier at best here's the bottom line the Canadian version of us
ETF apps will always be more expensive so your profits will always be falling behind so higher
Annual fees might not be enough to convince you but how about a 15 reduction in your dividends
it's true a Canadian listed U.S ETF will always have a smaller dividend yield than the US version
let's compare vfv and vlo their stock charts are the same remember it's the same fund but
look at the dividend voo has a dividend yield of 1.59 but vfv only pays 1.29 why the drop foreign
withholding taxes on U.S dividends if you've been watching my channel you've heard me say
a hundred times I do not hold U.S dividends in my tfsa because U.S dividends will be charged of 15
withholding tax even though the tfsa is tax free but if you hold U.S dividend stocks and ETFs in
your rrsp instead you avoid this 15 withholding tax to the US government so my U.S Investments
can grow and compound even faster in an rrsp and this is a a common mistake that I get asked about
all the time since vfv trades in Canadian dollars you may think that these are Canadian dividends
but they're not those dividends come from U.S companies so they will be taxed 50 percent right
out the gate and there's nothing you can do about it but what if I hold vfv in my rrsp shouldn't
that waive the 15 tax unfortunately no the only way to avoid taxes on your U.S dividend is to buy
the US dollar version of the ETF like voo and hold it in your rrsp if you hold a vfv or any Canadian
ETF that holds U.S stocks your dividends will be cut by 15 no matter what it's totally out of your
hands and that's because those taxes are paid by the ETF itself let's see this in action with vfv
go to the vfv page on the Vanguard website scroll down and click on price and distribution go down
to the annual distributions and you'll see for each year the different components that make up
the dividend or distribution that you receive with vfv the vast majority of this money comes from
foreign income U.S dividends so vfv has to pay the 15 withholding tax if you divide these two numbers
you'll get 15 percent let's do the math real quick dividing these two numbers we get 15 so Vanguard
pays 15 in tax and we get what's left over that's why the dividend yield of vfv will always be lower
than voo of course the S P 500 contains mostly growth oriented tech stocks so the goal with vfv
is more capital gains rather than dividends but still why lose out on 15 of that passive income
when you could just hold vo instead in your rrsp and collect that full dividend this makes an even
bigger impact with high yield ETFs here we have zdy another Canadian ETF that tracks U.S dividend
stocks it has a respectable dividend yield of 2.6 percent but remember it's already lost 15 percent
of that income because of of those withholding taxes instead if there was a U.S version of this
ETF you would receive the full dividend over three percent yield that does make a difference year
after year so for me investing in vo is cheaper more tax efficient and more profitable than vfv
so is vfp always a mistake no not at all if you are in a lower tax bracket and you don't expect
your income to increase before retirement then the rrsp really doesn't make sense for you you
should focus on the tfsa instead and without the rrsp you can't avoid the 15 withholding tax on
U.S dividends whether you buy vo or vfv so in that case you might as well Buy vfv in Canadian
dollars and avoid currency conversion and that currency conversion is what really scares off
investors especially beginners I get it we're paid in Canadian dollars we spend Canadian dollars so
we want to invest in Canadian dollars and I'm sure you know the high cost of exchanging currencies
which can be true but there is a better way if you use a broker like Wells the trade they'll
charge you a 1.5 conversion fee whenever you buy U.S Investments and they charge you again when
you sell those Investments that can cost you a ton of money in the long run that's why I only
recommend wealth simple for Canadian investing but for us investing I use Quest trade because I can
hold both currencies and even better I can use norbert's Gambit to convert my Canadian Dollars
into US dollars without paying any conversion fees and trust me norbert's Gambit is not complicated
I use it at least once a month every time I buy U.S stocks it literally only costs me five dollars
and in three days I have US Dollars ready to trade with watch my step-by-step tutorial to see exactly
how it's done I'm not exaggerating this technique has saved me thousands of dollars over the years
and I wish more Canadians knew about it to use norbert's Gambit I recommend questrade my favorite
broker in Canada and if you want to sign up click my referral link down below to get fifty dollars
in commission free trade rebates for the first 30 days that saves you fifty dollars plus I'll get a
small referral bonus as well the last thing I want to mention is currency hedging I can make a whole
video about this but the short version is that it does not matter vfv is unhedged meaning that
it is affected by the value of the US dollar this can be misleading when you look at performance on
the Vanguard website vfv has a 10-year return of 309 that's amazing and even better than voo with
a return of 215 percent how is that possible they are the same fund well because vo is in
US Dollars its profits only depend on the growth of the underlying stocks if those stocks go up the
ETF goes up simple the same applies for vfv but on top of that if the US dollar grows stronger
those U.S stocks are worth even more when you convert back to Canadian and since the US dollar
has grown significantly in the past 10 years vfv benefits from that exchange rate but this
doesn't matter when you're comparing because if you invested in b ELO you have US dollars
so when you eventually convert back into Canadian you gain that same exchange rate benefit all at
once if you want proof look at VSP which is the hedged version of vfv basically if you take vfv
and you remove the US dollar appreciation you're left with a 10-year return of 184 still great but
as expected it's less than the 215 return you would get with voo remember Canadian ETFs will
always underperform their us counterparts because the higher management fees and the
15 cut to their dividends so there you have it that's why I don't invest in vfv or any Canadian
ETF that holds U.S stocks so bottom line which one should you choose if you use an rrsp and norbert's
Gambit to convert into US dollars then invest in vo it will earn you more money in the long
run but if you have a lower income and don't use the rrsp then vfv is easier to get started
and dollar cost average but as your portfolio grows it will cost you more every year thanks
for watching guys and be sure to like comment and subscribe if you found this video helpful
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thanks everyone and I'll see you guys on the next episode of the Canadian and a t-shirt bye guys