# US Index ETF in TFSA



## callyhan (Dec 7, 2010)

I have about $10K I'm moving from my savings account to my discount broker that I'd like to invest in a US Index ETF since I have no international equity exposure yet in my portfolio. My RRSP is being invested into voluntary contributions to my pension fund, and I have a DB pension which I consider my "fixed income" portion of my portfolio. So my RRSP investing is taken up with these investments not really allowing any room for international exposure, the reason for holding this in my TFSA. 

My knowledge is kind of fuzzy on the tax implications of owning US equities in my "non retirement" TFSA. If I don't want to pay foreign witholding tax, is my only option to buy an ETF on the TSX that replicates the US market but doesn't pay dividends (like HXS)? Is there a US dollar (non hedged) ETF that replicates S&P 500 that is traded on the TSX?


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## eulogy (Oct 29, 2011)

HXS.U is the US dollar version.


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## GoldStone (Mar 6, 2011)

callyhan said:


> If I don't want to pay foreign witholding tax, is my only option to buy an ETF on the TSX that replicates the US market but doesn't pay dividends (like HXS)?


Yes



callyhan said:


> Is there a US dollar (non hedged) ETF that replicates S&P 500 that is traded on the TSX?


ZSP.U but it's subject to withholding tax.


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## GoldStone (Mar 6, 2011)

HXS has an extra 0.30% cost (swap fee) that doesn't show up in the MER.

S&P500 currently yields 1.97%. 1.97% * 15% withholding tax = 0.2955%

So it's roughly a wash.


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## Soils4Peace (Mar 14, 2010)

Consider getting QQQ or ZQQ for your TFSA. The NASDAQ index has lower dividend yield, so less tax will be withheld. Just don't let your allocation to NASDAQ get too high, as it is heavily weighted to technology and AAPL. 

Also consider other asset classes like Canadian small caps or REITs.


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## GoldStone (Mar 6, 2011)

Consider VTI (MER=0.05%) if you want to index broad market. It has roughly the same yield as S&P500.

QQQ has a MER of 0.20%. It wipes out the tax advantage of the lower dividend yield.


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## james4beach (Nov 15, 2012)

callyhan said:


> My knowledge is kind of fuzzy on the tax implications of owning US equities in my "non retirement" TFSA. If I don't want to pay foreign witholding tax, is my only option to buy an ETF on the TSX that replicates the US market but doesn't pay dividends (like HXS)? Is there a US dollar (non hedged) ETF that replicates S&P 500 that is traded on the TSX?


I think S&P 500 is the way to go, for a primary US index investment. I wouldn't use the NASDAQ as my core investment. In the TFSA you'll just have to accept the withholding tax as I don't see any way around it. Goldstone makes the important point that with HXS, it's a wash... you're not gaining anything with HXS.

My recommendation is that you go with the lowest MER, US traded ETF you can find, which I think is *VOO at 0.05% MER.*

VOO total fees 0.05% MER + 0.3% withholding = 0.35% <--- looks good to me
HXS total fees 0.17% MER + 0.3% swap fee = 0.47%

Any of the TSX traded ones, even the non-hedged ones, have all the withholding taxes and automatically higher MER.


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## Belguy (May 24, 2010)

Do you remember, not all that long ago, when recommending a U.S. equity ETF was a tough sell? Back then, the S&P was languishing and the TSX was flying high, with it's overweight on commodities. Then, everything changed and commodities tanked and the more diversified U.S. indexes started to outperform.

So, what is the moral of this story--the advantages of market timing which is something that I have often preached against? Or, is it that buy-and-hold investors are better off investing in a more diversified equity market as exists in the U.S. rather than the more concentrated TSX?

What portion of the equity allocation in your portfolio should be in a U.S. versus Canadian index fund?

Is a 100 per cent allocation to a U.S. equity ETF in a TFSA a good strategy?


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## GoldStone (Mar 6, 2011)

Belguy said:


> Do you remember, not all that long ago, when recommending a U.S. equity ETF was a tough sell?


No


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## callyhan (Dec 7, 2010)

I didn't realize there was a swap fee, guess I need to do some more research. Thanks for all the replies, the help is appreciated. Wanted to make sure that I wasn't missing something obvious. I agree US equities are best held in an RRSP in most cases, but in my situation I need to work around it.

Belguy, 10K is not 100% of my TFSA. I plan on holding this for a long time, and some diversification will be a benefit to my Canadian weighted portfolio.


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## Sampson (Apr 3, 2009)

GoldStone said:


> No


I also don't remember when it was a tough sell.

Before the crash, everything looked great and return potential was unlimited. After the crash, everything looked great and return potential was unlimited.

In the past 5 years, only now have people begun to say that investing now into US equities would be investing at the top - I suppose they must have it right this time. who are these people making recommendations anyway?


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## Belguy (May 24, 2010)

Well, don't look at me!!!:tongue-new::chuncky::biggrin-new::highly_amused:


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