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The MER savings on U.S. ETFs disappear fast once you count FX spreads and withholding tax
The MER savings on U.S. ETFs disappear fast once you count FX spreads and withholding tax
VFV, Vanguard's Canadian-listed S&P 500 ETF, charges 0.09%. VOO, the U.S.-listed version of the same fund, charges 0.03%. Six basis points looks like free money. It isn't.
The difference vanishes the moment you convert Canadian dollars to buy the U.S. fund, and it stays gone if you're holding the fund in anything other than an RRSP. The MER gap is real. The net benefit, for most investors in most accounts, rounds to zero or goes negative.
The conversion spread eats the first year
Currency conversion has a cost even when your brokerage doesn't charge an explicit fee. The bid-ask spread on CAD/USD typically runs 1% to 1.5% at retail brokerages. Norbert's gambit can cut that to around 0.2%, but it requires a multi-step trade and settlement lag. Either way, you pay the spread once on the way in and again on the way out if you ever convert back to Canadian dollars.
At a 1% round-trip cost, you need to hold the U.S. ETF for roughly 16 years before the cumulative 0.06% annual MER savings offset the initial conversion hit. If you use Norbert's gambit and pay 0.4% round-trip, the breakeven drops to about six years. But those calculations assume you never rebalance, never withdraw, and hold in an account where withholding tax doesn't apply.
Most people don't meet all three conditions.
Withholding tax flips the math in taxable accounts and TFSAs
U.S. ETFs pay dividends. On those dividends, the IRS withholds 15% from Canadian investors, no matter what. Canadian-listed ETFs holding U.S. stocks face the same withholding, but if you hold a Canadian ETF in a taxable account, you can recover that as a foreign tax credit on your return. You cannot recover withholding inside a TFSA. Ever.
In a TFSA, that 15% withholding on a 1.5% dividend yield costs you 0.225% per year. The MER savings on VOO versus VFV is 0.06%. You are paying nearly four times the MER difference in unrecoverable withholding tax. The U.S. ETF is strictly worse.
The only account where the withholding tax doesn't apply is an RRSP, where the Canada-U.S. tax treaty exempts registered retirement accounts. There, the U.S.-listed ETF actually delivers the MER savings. If you're holding in a taxable account, the foreign tax credit offsets the withholding but adds paperwork and doesn't help if your income is too low to use the credit.
When the U.S. version makes sense
RRSPs holding U.S. equity ETFs for the long term, that's the narrow window where the savings land. You avoid withholding tax. You convert once and don't plan to convert back for decades. The MER difference compounds in your favor.
Outside that scenario, the calculus tilts back to Canadian-listed funds. Lower friction, simpler tax treatment, no FX risk if you're spending in Canadian dollars. The sticker-price MER is higher. The all-in cost is often lower.
The industry loves to sell the idea that cheaper is always better. Cheaper at the fund level is not the same as cheaper at the portfolio level, and cheaper this year is not the same as cheaper over the full holding period. Run the actual numbers for your account type, your timeline, and your FX strategy. Most of the time, the six basis points you thought you were saving were already gone before you clicked buy.
The MER savings on U.S. ETFs disappear fast once you count FX spreads and withholding tax
VFV, Vanguard's Canadian-listed S&P 500 ETF, charges 0.09%. VOO, the U.S.-listed version of the same fund, charges 0.03%. Six basis points looks like free money. It isn't.
The difference vanishes the moment you convert Canadian dollars to buy the U.S. fund, and it stays gone if you're holding the fund in anything other than an RRSP. The MER gap is real. The net benefit, for most investors in most accounts, rounds to zero or goes negative.
The conversion spread eats the first year
Currency conversion has a cost even when your brokerage doesn't charge an explicit fee. The bid-ask spread on CAD/USD typically runs 1% to 1.5% at retail brokerages. Norbert's gambit can cut that to around 0.2%, but it requires a multi-step trade and settlement lag. Either way, you pay the spread once on the way in and again on the way out if you ever convert back to Canadian dollars.
At a 1% round-trip cost, you need to hold the U.S. ETF for roughly 16 years before the cumulative 0.06% annual MER savings offset the initial conversion hit. If you use Norbert's gambit and pay 0.4% round-trip, the breakeven drops to about six years. But those calculations assume you never rebalance, never withdraw, and hold in an account where withholding tax doesn't apply.
Most people don't meet all three conditions.
Withholding tax flips the math in taxable accounts and TFSAs
U.S. ETFs pay dividends. On those dividends, the IRS withholds 15% from Canadian investors, no matter what. Canadian-listed ETFs holding U.S. stocks face the same withholding, but if you hold a Canadian ETF in a taxable account, you can recover that as a foreign tax credit on your return. You cannot recover withholding inside a TFSA. Ever.
In a TFSA, that 15% withholding on a 1.5% dividend yield costs you 0.225% per year. The MER savings on VOO versus VFV is 0.06%. You are paying nearly four times the MER difference in unrecoverable withholding tax. The U.S. ETF is strictly worse.
The only account where the withholding tax doesn't apply is an RRSP, where the Canada-U.S. tax treaty exempts registered retirement accounts. There, the U.S.-listed ETF actually delivers the MER savings. If you're holding in a taxable account, the foreign tax credit offsets the withholding but adds paperwork and doesn't help if your income is too low to use the credit.
When the U.S. version makes sense
RRSPs holding U.S. equity ETFs for the long term, that's the narrow window where the savings land. You avoid withholding tax. You convert once and don't plan to convert back for decades. The MER difference compounds in your favor.
Outside that scenario, the calculus tilts back to Canadian-listed funds. Lower friction, simpler tax treatment, no FX risk if you're spending in Canadian dollars. The sticker-price MER is higher. The all-in cost is often lower.
The industry loves to sell the idea that cheaper is always better. Cheaper at the fund level is not the same as cheaper at the portfolio level, and cheaper this year is not the same as cheaper over the full holding period. Run the actual numbers for your account type, your timeline, and your FX strategy. Most of the time, the six basis points you thought you were saving were already gone before you clicked buy.
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