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.