# VUS or VTI? Please check my math & logic



## rglempera (Apr 2, 2011)

I am setting up my RSP in my new iTRADE acct and have been trying to find the right ETF for the US equity portion of my portfolio, i.e. should I buy a CDN$ fund or a USD$ fund? I read this article which helped but didn't give me a clear answer: http://canadiancouchpotato.com/2013/06/27/the-wait-is-over-new-etfs-from-vanguard/

So I'm trying to decide if I should buy VUS, the CDN$ fund, or VTI, the USD$ fund. If I buy VUS, I have no FX costs but 15% of my dividends are withheld and I can't claim tax credit since it's an RSP. If I buy VTI, the MER is lower & I get to keep all dividends but I pay FX fees when buying & selling the fund. VUS has MER of 0.17% and quarterly yield of 0.328%, while VTI is 0.05% and 0.488% respectively. I found this surprising, I thought the yields would be the same given the funds are so similar.

So with the help of a friend I ran some numbers based on the following assumptions:
- Invest $15k, leave it for 25 years
- I will need to pay 1.25% spread when converting CDN-->USD and vice versa (though I'm hoping I can negotiate better)
- Both funds will have same capital gains averaging 4%/year
- All dividends will be reinvested to purchase more of the fund
- I will not need to pay FX to re-invest my dividends back into VTI

I concluded that VTI is the clear winner, value after 25 years would be $62,963 vs. $51,253 with VUS. I was shocked by the difference caused by the witholding tax! I also ran the numbers assuming my VUT dividends would be hit with 2.5% FX fees (to convert to CDN$ then instantly back to USD$ to reinvest) -- even then value is way higher at $62,210.

So my questions are:
- is it accurate that VTI and VUS have different yields?
- any holes in the assumptions I set up?
- does my math hold up?
- anything else I should be considering?

Thanks - RG


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## HaroldCrump (Jun 10, 2009)

rglempera said:


> - I will need to pay 1.25% spread when converting CDN-->USD and vice versa (though I'm hoping I can negotiate better)
> ...
> - All dividends will be reinvested to purchase more of the fund


I can't help you much with the alphabet soup of ETFs, but just on this point of currency conversion - if you are converting in real-time using the Scotia iTrade website, you cannot negotiate any preferred rate, as far as I know.
Also, the spread is often more than 1.25%.
It appears to vary, and there is a thread dedicated to people reporting the actual applied rate on automatic currency conversions.

For automatically re-invested dividends, the currency conversion hit is round trip i.e. double the spread.
If the one-way spread is 1.25%, you are looking at a 2.50% haircut.
But as I said, some folks have reported ~ 3% haircuts on automatically re-invested dividends.

The only way to get a preferred forex conversion rate is - if you are a high value client with lots of $$$ to convert and have a good relationship with your branch manager, you may be able to get a better rate over-the-counter.
So do your conversion at the bank, then do the transfer online of US$ into your trading account.

I suspect (but can't confirm with 100% certainty) that all automatic forex conversions done via the website attract the same conversion spread.


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## uptoolate (Oct 9, 2011)

Why not use Norbert's Gambit and save a big chunk of change on the currency conversion.


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## humble_pie (Jun 7, 2009)

gosh, u are going to invest 15k in a US equity fund in an rrsp & leave it there for 25 years?

please do not set out to do this at a broker that offers only CAD registered accounts. Scotia is such a broker. Do not go there. They will ding you FX fees on every dividend if you hold the US version of the etf. Or - as you say - you will lose the withholding tax if you hold the CAD version.

go instead to a broker that already offers CAD/USD rrsp accounts. There are presently only 3 of these. They are bmo, questrade & roybank. There you can buy & hold your VTI to your heart's content.

you can also exchange your initial 15k from CAD to USD via a strategy known as a gambit. Two of these brokers - bmo, ry - have trading platforms set up to handle gambit trades instantly & online. There is a little difficulty with questrade but all is still doable using a carrier etf called DLR.


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## uptoolate (Oct 9, 2011)

Good advice re starting out to get with a discount broker that has both USD RRSP accounts and supports seemless gambiting. I am with TD Waterhouse still waiting for the long promised USD RRSP while handling my mom's accounts with RY is a relative breeze.


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## humble_pie (Jun 7, 2009)

questrade, as it turns out, isn't really seamless. Investor has to phone to journal the carrier stock in order to set up the final sell transaction.

bmo & roybank offer USD/CAD rrsps with seamless online gambitting.

strangely enough, td direct has seamless online gambitting but in rrsp & tfsa only. Investors in cash or margin accounts have to phone for the sell side.


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## rglempera (Apr 2, 2011)

Thanks for the replies. I ran the numbers and if I paid just $40 in trades to run the Gambit twice and no FX fees on dividends the difference over 25 years vs. my previously planned approach is $1,606. Yikes. 

I already signed paperwork with iTRADE and gave them the right to transfer funds from my RBC MFs, I guess I better call them and ask them to cancel the transfer/accounts!


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## Guban (Jul 5, 2011)

rglempera said:


> So I'm trying to decide if I should buy VUS, the CDN$ fund, or VTI, the USD$ fund. If I buy VUS, I have no FX costs but 15% of my dividends are withheld and I can't claim tax credit since it's an RSP.
> Thanks - RG


Should not be any US withholding tax in your RRSP. Make sure you have filled out the W8 BEN.


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## mrPPincer (Nov 21, 2011)

Guban, rglempera was right about the US withholding tax, VUS is a Canadian based fund which holds an underlying US-based one and will therefore be subject to the 15% tax which is unrecoverable in a registered account.


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## My Own Advisor (Sep 24, 2012)

I would buy the VTI, especially if you can hold this in a USD $$ RRSP.


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## CanadianCapitalist (Mar 31, 2009)

I hold VTI and have been for years. IMO, unless you will be hit with US Estate Taxes (effectively, the limit is worldwide assets of $5m/$10m per couple), US ETFs are clearly superior for long-term investors. The following post is a bit dated but it explains my reasoning:

http://www.canadiancapitalist.com/why-i-prefer-us-listed-etfs/


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## My Own Advisor (Sep 24, 2012)

Good post CC.


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## rglempera (Apr 2, 2011)

I cancelled my transfer from RBC to iTRADE. Instead, I will open an RSP acct with RBC DI, use the gambit to buy VTI and hold on to that, reaping my full dividends for the years ahead. I was able to save (or make) over $1600 more when I retire thanks to a simple post and all the knowledge you people dropped on me -- awesome stuff -- thanks!


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