US Dollar vs. Canadian Dollar Investments Inside RRSP?

I am going to be buying a US ETF (like an S&P 500 ETF) and an international ETF (like an MSCI EAFE ETF) in the near future in my or my wife’s E*Trade self-directed RRSP account. I was just wondering if anyone out there has some good advice on whether I should buy the US dollar ETFs, like VTI (Vanguard Total Market) or EFA (iShares ISHARES MSCI EAFE ETF), or the Canadian-dollar hedged versions, like XSP (iShares S&P 500 ETF) and XIN (iShares MSCI EAFE ETF). Currently I have no USD investments.

Here’s the advice I have to go on so far. This might be of interest to others who are asking the same questions.

  • Martin Gale seems to recommended the Vanguard funds (which are all in USD-only and traded on US exchanges) because of their low MERs. He reminds readers to “please think about where you will be when you spend your investment savings. If you are planning to live in Canada then your expenses will be paid in Canadian dollars. In that case it would be worthwhile making sure a lot of your investments are in Canadian dollars as well–perhaps by concentrating on Canadian bonds.”
  • In another article by Martin Gale about the scrapping of Foreign Content rules in RRSPs, he has a long section called “Thinking About Currency.” The key message here seems to be balance. Some currency risk (ie. having some holdings in USD) is ok but make sure a significant portion of your savings is in Canadian dollars. He throws around 40% CAD in your nest egg for young people and 80% for more conservative investors, saying that “That should provide adequate protection from the whims of the swinging Loonie while still ensuring a proper global allocation.” On the other hand, too much investment in Canadian dollars is also bad thing. In another article entitled “How much US dollar investment in your RRSP is too much?” he says that “If you still have many income earning years ahead of you, but your job prospects depend on the Canadian economy (most working people’s do) then you might want to avoid Canadian investments lest your job and your savings are both lost in the same Canadian recession.”
  • The Canadian Capitalist has mentioned USD currency exposure a lot in the past and in fact just re-iterated his opinion on it today, “I believe that investors with a reasonably long-term view (more than 10 years) should ignore currency fluctuations, as it is impossible to precisely predict currency movements even in the near-term.” In other words, I think what he’s saying is that the currency fluctuations will help you some years and hurt you in others but over the long term your return in CAD will probably be fairly close to the return in USD. A while back he talked about the difference between iShares and iUnits (the Canadian ones, now also called iShares). He later said he would have used the USD versions rather than the CAD versions if he were to start the Sleepy Portfolio all over.

I am leaning towards going with the USD versions since I have no US currency exposure, and to avoid the extra cost associated with the currency hedging on ETFs like XSP and XIN. Also, as Martin Gale said, the Vanguard ETFs are very low-cost, and there is more variety, compared to what we have available in Canada.

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17 Responses to “US Dollar vs. Canadian Dollar Investments Inside RRSP?”


  • Like I mentioned on the Canadian Capitalist’s blog, I think you should be aware of the very real long term currency
    risk you are exposing yourself to when going outside of Canada.

    Unfortunately there isn’t a really good currency hedge for retail investors (how hard would it be to have CAD/USD or CAD/EUR ETFs?) who are risk adverse. Nonetheless, if you are aware of the risk and mitigate it by periodically rebalancing your portfolio, then you should be fine in the long term.

  • I have a related question. I have a bunch of US dollars. I want to use these US dollars to purchase a US-dollar denominated Index fund. I want to do this in a new RRSP. My bank said that all RRSPs have to be denominated in Canadian dollars. This struck me as incorrect. Is it correct? Must I convert my USD to CAD and then buy a US-denominated US index fund by converting back the CAD?

  • Quick reply: That’s correct, the cash portion of an RRSP must be in CAD.

  • Thanks, Dave.

    But, what if I directly purchased the USD-denominated index fund with USD and desginated the purchase as my RRSP? The only reason I would ever have the USD in cash would be as an interim step toward this purchase; the USD-index fund is the ultimate goal. Do I still need to convert USD to CAD and then back to USD for the USD-index fund.

  • Well usually the banks only allow you to hold CAD cash inside your RRSP.

    The answer to your question “Do I still need to convert USD to CAD and then back to USD for the USD-index fund?” is yes, unless the bank allows “wash” trades. See my post about foreign currency investments inside RRSPs and this article for more info.

  • Thanks, Dave. That is really helpful. I hope this gets resolved – and more than just TD come to offer wash trades.

  • In the mean time, the most sensible thing to do is to just buy & hold your USD investments inside your RRSP. You’ll incur the exchange when you go from CAD to USD but nothing after that until you withdraw. Or just buy the CAD versions of mutual funds and/or ETFs.

  • Yes, will do. I invest for the long-term, according to the asset mix suggestion implied in David Swensen’s Pioneering Portfolio Management; periodic rebalancing is all I will do.

  • I’ve been on traveling recently and just read this post. My suggestion to Tim is to buy a USD-denominated stock/ETF in his investment account and then make a contribution in-kind to his RRSP. I do this all the time and at RBC Direct there is no charge for the service.

    I am firmly of the belief that currency hedging has dubious benefit for long-term investors. Hedging has a cost (15 bps extra for XSP compared to IVV) and the key question is if the cost is worth the benefits. My answer is no because (a) a lower USD will benefit many of the large S&P components (b) S&P components with overseas operations themselves hedge the exposure (c) how come everyone is warning against currency risk AFTER the bulk of the appreciation has taken place? (d) For long-term investors who are going to periodically invest in the markets, they may or may not benefit from currency, but cost is a certainty (e) EFA itself is denominated in other currencies like euros, pounds and yen. Why put a hedge on top of a basket of currencies?

    I think your decision to invest in USD assets directly without a hedge is a wise one.

  • Oh, BTW, I’d go with the VTI instead of the S&P 500 because you also get exposure to small-caps (around 20% I think). Personally, I am going to get US exposure with VTI and add a small-cap value tilt.

  • Great advice, Canadian Capitalist! I checked – and unlike RBC, BMO Investorline charges $25 for the contribution in kind to the RRSP (called by BMO as a “Transfer to RRSP fee”). Anyway, good advice nonetheless.

    On VTI – yes, purchased it yesterday. I also put small amounts of money in a US small-cap index, a real-estate index and an international equity index. I rounded out my portfolio allocation with the lehman bond index. I already hold a European index – so, I think I am now good.

    I strongly believe in David Swensen’s asset allocation advice – and am embracing his approach.

    In terms of currency hedging – I think it makes sense to have some assets in CAD$, a CAD$ index and maybe a small-cap index. But, total portfolio allocation should mirror our economy’s relative weight in the world (so, pretty small). As I get close to retirement – quite a long way away to be sure (I am only in my late 30s), I will move assets to CAD$.

    Thanks again for your advice!

  • Fernando Montenegro

    I’m also looking into this for my personal RRSP. One other aspect in favour of US-based ETFs investing in the US market versus Canadian-based ETFs in the same market is a potential tax benefit.

    According to what I’ve found so far, that the tax treaty between Canda and US specifies that no tax is withheld on distributions in US investments that are meant for Canadian retirement (RRSP).

    To me (I’m not an accountant…) this means that I get the full dividend distribution from a US-based ETF if I hold the US-based ETF, while a Canadian ETF holding the same investments must deduct the withholding tax.

    Assuming a 15% withholding tax, this can mean 45bps on a 3% dividend. Quite significant, if I understand this right…

    Can anyone confirm this?

  • Investoid, this is a late reply to your comment, but one should also be aware of the risk of having all one’s investments in Canadian dollars, due to inflation. Diversifying to other currencies reduces this risk.

  • Fernando, I can’t confirm this unfortunately. But if I ever find out I will let you know.

  • I have 60 thousand sitting in a canadian saving account. I now live in the US and would like to know if it’s better to have my money converted to Us dollars now that it at near par? Can anyone advice me?
    Many Thanks

    Albert

  • Albert, just leave it. If you convert it you’ll lose money on the exchange.

  • Pardon the newbie question. With the Can-US exchange rate so favorable right now, is this the ideal timing to buy US ETF’s such as those from Vanguard? I dont have a crystal ball, but I assume that the Can dollar can do one of two things, which is stay at PAR, or go back down at one point.

    Im contemplating signing up for discount brokerage, to buy and hold (couch potato) Vanguard Index ETF’s. My goal is to first open personal RRSP and LIRA accounts, and spousal RRSP account. Then I want to move my existing National Bank/Altamira Index Mutual Funds with MER of .63%, to various iShares and Vanguard ETF’s. I also have my banking at NAtional Bank (mortage, HELOC, etc). Due to the “size” of my $155,000 portfolio, signing up for their National Bank NBDB discount brokerage would lower trade fees to $9.95 + currency conversion. Even if this is probably higner than most non-bank based brokerage firms, the impact to me is not so great since I would not be trading often, (yearly contribution and/or re-balancing my portfolio).

    Even if there are lower MER Canadian Funds out there such TD e-Series, I think moving to another big-bank brokerage is pointless, since going forward, I would rarely contribute into these mutual funds anymore, if at all. As it stands now, it is more advantageous for me to contribute to my employer matching RRSP program, and “pay myself” directly from my gross pay. The once a year, move this amount to my ETF’s.

    Does my strategy make sense?

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