Can You Buy VTSAX As A Canadian?

For anyone new to the FIRE movement, one of the recurring messages you’ve likely heard within members of the FI community is our affinity for low fee index funds.  And the index fund that gets mentioned the most, by far, is VTSAX.  It’s likely only a matter of time that you’ll encounter this acronym that you’re unfamiliar with when you start down the FI rabbit hole.

Maybe you start with The Simple Path to Wealth by Jim Collins, which many people regard as the holy grail for FIRE followers.  Or if you can’t get your hands on JL’s book, then you’ve read his Stock Series which is what the book is based on.  The information within the 286 pages of his book is fantastic but the focus is definitely on Americans.  The major take away from this book is to invest in VTSAX, the US-based index fund from Vanguard that tracks the overall US stock market.

Or maybe you start by going down the Mr. Money Mustache rabbit hole and read all of the MMM blog posts and come to his post from 2011 on How to Make Money in the Stock Market and learn about VTSAX’s cousin, VTI (the ETF version of VTSAX).

Before we dig in, I wanted to highlight that this post is long overdue and really a clarification post to another blogger out there (who shall not be named) who made a similar post but it was so so wrong.  They were basically writing that the Canadian equivalent of VTSAX (which tracks the overall US stock market) was a ETF that tracks the overall Canadian stock market. Noooooo those are two totally different funds tracking two very different markets/companies!!  There is also a Reddit thread on this topic which answers the question but there’s also a lot of other information out there which could steer you in the wrong direction.  Thankfully, my friend Ryan over at Canadian FIRE also wrote a great post on this topic called Translating VTSAX for Canadians. I was thrilled when I saw he had posted on this topic too and kept this in the draft area rather than give it a future scheduled posting date thinking there was no need to post this as this topic has now been covered properly.  Then I thought, what the hell, I have this 80% done, just get it out to the world.  So here goes.

What is VTSAX?

All funds have an associated acronym to them and VTSAX stands for Vanguard Total Stock Market Index Fund Admiral Shares.  The intended purpose of this index fund is to track the performance of the entire US stock market.

Hold on.  If this is already sounding a bit like a blur have no fear.  If you’re thinking “What’s an ETF?” or “What’s an index fund?” let’s take a step back.  If you need a refresher on different types of funds, head back to Part 6 of our Investing 101 Series. This Investing 101 Series was geared for newbies to help get you comfortable with investing.

Ok, all clear now?  Let’s move on.

VTSAX requires a minimum investment of $3,000, comes with a 0.04% expense ratio, and holds a mix of 3,640 different stocks with the top 10 of the largest holdings comprising 23.6% of the net assets.

The 10 largest holdings (as of this writing) are:

1. Apple Inc.
2. Microsoft Corp.
3. Amazon.com Inc.
4. Alphabet Inc. (i.e. Google)
5. Facebook Inc.
6. Tesla
7. Johnson & Johnson
8. Berkshire Hathaway Inc.
9. JPMorgan Chase & Co.
10. Visa Inc.

While VTSAX provides a diversified portfolio thanks to its mix of 3,640 stocks, there are a few sectors that are more heavily present.  You can likely guess which sectors simply based on the top 10 list above.  As of 1/31/2021, 26.6% of the funds are in the tech sector with the other top sectors being 16.4% consumer discretionary, 14.0% health care, 13.3% industrials, and 10.4% financials.

Since it’s inception in 1992, VTSAX has performed with an average annual return of 8.87% (as of March 31, 2020).  The fund’s Admiral Shares, the only one currently available to new investors, has returned an annual average of 7.82% since its inception on November 13, 2000 (as of December 31, 2020).  As noted above, VTSAX is designed to closely mimic the performance of the entire US stock market.  It’s also important to remember that historical performance is no guarantee for future returns.

Moral of the story: VTSAX provides a broad diversification of US funds at a low cost.

VTSAX in Canada?

Ok great.  We like VTSAX for its low cost and it’s diversification.  But when a Canadian tries to buy VTSAX they suddenly are at a standstill.  There’s no such fund called VTSAX in Canada.

What are we to do?  Let’s take a step back and ask a few questions:

• Does Vanguard exists in Canada?  Yes. Phew.
• Can you open up an account directly through Vanguardcanada.ca? No. Uh-oh.
• Can you purchase a list of Vanguard Index ETFs in Canada? Yes. OoOoO tell me more.
• Is VTSAX one of them?  No. Ugh.

Ok this is a bit murky.  Where do we go from here?

Fear not.  We’re here to show you how to purchase the closest thing to VTSAX in Canada.

The low cost brokerage companies in the US are Vanguard, Fidelity, and Charles Schwab.  These brokerages offer thousands of their own products to their customers.  So if you open a Vanguard account in the US, you then have access to VTSAX.  Similarly, for Fidelity it’s FZROX and for Schwab it’s SWTSX.

In Canada, it’s a little bit different.  You can access Vanguard products in Canada through a third-party financial advisor or an online brokerage account. So essentially, there is a middle man.  We want to keep these fees as low as possible so we recommend using an online DIY brokerage account.  The best DIY brokerage companies in Canada are Questrade and Wealthsimple Trade.  These companies do not offer their own products, instead, they offer investment products from other companies, like Vanguard, iShares, etc. along with individual stocks.

So you open up a say Questrade account (be it an RRSP, TFSA, RESP, non-registered, etc.), and then you now have access to select a Vanguard fund to invest in within that account.  Questrade charges $0 to purchase ETFs which is definitely a nice feature.

Ok, now we’re able to tap into the world of Vanguard but with no VTSAX in sight what Vanguard product do you choose?

Is It VCN?

Looking at the list of Vanguard Index ETFs in Canada, your first option is VCN which is “FTSA Canada All Cap Index ETF”.  While the “All Cap Index ETF” and its low MER of 0.06% may lead you to believe this is the Canadian equivalent of VTSAX, it is not.  Instead, VCN is the index tracking 195 stocks within the Canadian market, not the US market.  This is an entirely different product!  This is what the original I post I read on this topic was trying to convey and oy vey no no these are very different funds.  Not bashing this ETF, but it’s nowhere close to going to get you VTSAX if that’s what you’re looking for.  Note that the Canadian market takes up a much smaller market share of the economy on a global level and the majority of the funds within VCN are Financials (31.9%), Energy (12.6%), Basic Materials (12.5%), and Tech (10.7%) (based off January 31, 2020) so I’d definitely recommend diversifying further if you’re looking to add VCN to your mix.

 

Maybe VUN?

You’ll have to scroll down nearly to the end of the equities portion of the list of funds to see VUN which is “US Total Market Index ETF”.  Let’s take a look.

Bing bing bing.

You’ll see that VUN holds 3,640 different holdings and its top 10 holdings match that of VTSAX and the sector weighting is the exact same.

It has a slightly higher MER of 0.16% compared to VCN at 0.06% and VTSAX in the states at 0.04% but sadly this is the price Canadians have to pay.  Canadians have some of the highest expense ratios in the world.  If I can stay under 0.25% in expense fees (aka MERs) in Canada I’m happy at this point (unfortunately).

The largest difference is that VUN is held in Canadian dollars, not US dollars which means VUN is not hedged against currency fluctuations.  What this means is that if you buy VUN when the CAD is low and then the CAD goes up, you lose money.  Vice versa if the CAD goes down compared to the USD.  Another way of thinking about it is that you make money when the currency of your foreign investment goes up (in this case the USD compared to the CAD) and you lose money when the currency goes down.

Buying VUN is, from a currency risk perspective, the same as exchanging CAD to USD and then buying VTI directly (again, the ETF version of VTSAX).  Your gains/losses in CAD will be determined at the time of conversion of USD back to CAD when you sell the funds compared to the exchange rate you had when you originally changed CAD to USD at the time of purchase.  So VUN reports the value of the US assets in Canadian dollars.

Or Maybe VUS For Currency Hedge?

There are also CAD-hedged funds that protects you against currency fluctuations.  Here you are purely following the performance of the holdings within the funds and do not take currency changes/fluctuations into play.  So it doesn’t matter that the USD/CAD exchange rate was at the time of purchase vs the time of sale.  Historically, funds that were hedged used to come with a higher fee.  However, the CAD-hedged option VUS which is “US Total Market Index ETF (CAD-hedged)” comes with the same 0.16% MER as VUN.  So this can definitely be an attractive fund to select if you do not want any currency risk.  However, there has been quite a bit of analysis done on this topic outlying why you may not want to be currency hedged in Canada.

So the question of VUN or VUS comes down to personal preference.  Do you want currency exposure or not?

US Withholding Taxes

It’s important to note that the US imposes foreign withholding tax for taxable accounts outside of the US which hold US companies. The additional tax consequence is 0.30% when a US company pays a dividend to non-residents worldwide.  Note that this extra 0.30% tax is only on the dividends which typically are in the 1-2% area.  So if the fund returns 8%, of which 6% is growth and 2% is dividends, you’d calculate a 0.30% hit on 2% not the full 8%.

However, the US and Canada currently have a tax treaty in place in that if you file a US Internal Revenue Service (IRS) Form W-8BEN, the rate is lowered to 15%.  Again, this tax is only applied to dividends, not capital gains so some may argue that Canadians looking to invest in the US market should focus on growth stocks which tend to lave low/no dividend payouts vs value stocks with higher dividends.  That’s a whole other topic of discussion beyond this post.

The US and Canada have a tax treaty for each other’s retirement accounts which is nice.  For RRSPs, there is a tax agreement between Canada and the US that eliminates the 15% withholding tax on US dividends if you hold the funds within your RRSP in USD.  Unfortunately, the US does not recognize the TFSA as a retirement account so US dividends within a TFSA are subject to the 15% withholding tax.  Why?  Who the eff knows.  The TFSA was introduced over 10 years ago, yet the IRS has yet to update its ruling/acknowledgment of this account.

This annoying nuance is also why I, as a dual US/Canadian citizen, sadly do not have a TFSA open in my name.  The tax complications of this account in the US apparently can cause major issues/headaches for dual citizens because the US does not recognize the TFSA as a retirement account even though it’s essentially the Canadian equivalent of a Roth IRA which is a retirement account in the States.

Holding US stocks directly in an RRSP gets this preferential tax treatment (i.e. no additional 15% withholding tax), however, an ETF that holds underlying ETFs does not qualify for the tax exemption.  What this means is that VUN and VUS are subject to the withholding tax within your RRSP as its a Canadian ETF holding US listings.

If you’re interested in learning more on this topic check out the following:

• Foreign Withholding Taxes: How to Estimate the Hidden Tax Dag on US and International Equity ETFs by PWL Capital
• The Real MER on ETFs – Foreign Withholding Taxes on ETFs by Million Dollar Journey
• Foreign Withholding Tax Calculator by Canadian Portfolio Manager
• Ask The Spud: When Should I Use US-Listed ETFs? by Canadian Couch Potato

The workaround?  This leads to the last fund to discuss on this post.

The Golden ETF: VTI

Hold VTI directly in your RRSP.

Like I’ve mentioned a few times already, VTI is the ETF version of VTSAX (which is an index fund).  Holding VTI, in USD not CAD, within your RRSP is the workaround to not getting hit with the US withholding tax within your RRSP.

How do you buy a fund held in USD when your currency is CAD?

Enter Norbert’s Gambit.

Norbert who? Confused yet?  Essentially you buy the DLR.TO ETF in CAD.  Then you send an email to your discount brokerage requesting to journal your DLR.TO position (which is held in CAD) to DLR.U.TO (which is held in USD). Note that you can place this request either though an email, over the phone, or online via their chat feature – email is definitely my preferred route.  The representative should know exactly what to do. The process takes a few business days.  Once you now hold DLR.U.TO (in USD), sell DLR.U.TO in the US market to cash.  You now have USD instead of CAD and can buy VTI with your USD.

If this sounds way too complicated don’t fret.  It really only takes up a few minutes of your time (spread out over the course of a few days).  There’s really nothing wrong with sticking with VUN or VUS within your RRSP as well, you’ll just be subject to the US withholding tax which really is not the end of the world.  At all.  Or you can choose to invest in bonds in your RRSP if you want bonds in your asset allocation.  Again, we’re going down another discussion which is beyond this post.

There We Have It

• VUN is how Canadians can buy VTSAX.
• VUS provides the same funds with your portfolio currency hedged.
• VUN is great for all Canadian accounts, but VTI is how you can get around the US withholding tax within your RRSP and have a slightly lower MER.
• VTI is the US ETF that Canadians can access via Norbert’s Gambit.
• For Americans, holding $10,000 in VTSAX will cost $4/year whereas for Canadians the equivalent will cost $16/year with VUN (slightly more with the withholding tax) or $3/year with VTI.

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We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.  Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:

• Investing Newbies: Check out our free Investing 101 Series.
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• How much are you paying for your monthly utility bills?  See how you can likely save on this monthly expense.

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