We’ve now covered just about everything you need to know about investing in total U.S. stock market ETFs, including a general comparison among four solid choices, as well as a discussion about the foreign withholding taxes involved.

By now, you might be asking yourself:

“If the product costs and foreign withholdings taxes on dividends are reduced by holding U.S.-listed U.S. equity ETFs in an RRSP, why not just buy VTI or ITOT, instead of VUN or XUU?”

And if there were no costs to convert your loonies to U.S. dollars (and back again), you’d be on the right track. But we haven’t yet touched on some of the biggest costs facing Canadian investors purchasing U.S.-listed ETFs. These are the high currency conversion fees levied by their brokerage.

Currency Conversion Fees in RRSPs

For example, let’s compare a $10,000 Canadian dollar investment in VTI and VUN within an RRSP. We’ll start both investments on January 1, 2014, which was the first full calendar year after VUN launched, and run through the most recent year-end. Across this period, we’d find that VTI did in fact grow at a faster rate than VUN, due to its lower product costs and the elimination of the 15% withholding tax on U.S. dividends received in the RRSP.

But there’s a catch. We’ve assumed there were no costs to initially convert $10,000 Canadian dollars to U.S. dollars to purchase VTI, and also no costs to convert those U.S. dollars back to Canadian dollars when you ultimately sell your VTI shares.

In reality, Canadian discount brokerages typically charge currency conversion fees of 1% to 3%. You won’t see this cost listed on your account statements, but the brokerage is basically taking a hidden commission during the transaction. This clever ruse is accomplished by adjusting the retail currency conversion rate the brokerage offers to their clients.

To illustrate: Let’s assume a brokerage can convert Canadian dollars to U.S. dollars at a favourable corporate rate of 1.25. This means that 1.25 Canadian dollars are truly worth around 1 U.S. dollar. Now that’s what it costs them. But to earn a 2% currency conversion fee from their clients, they would offer you a higher retail exchange rate of around 1.27551. This is calculated as the 1.25 corporate rate divided by (1 – their 2% currency conversion fee).

So, if you handed your brokerage $10,000 Canadian dollars, they would hand you back $7,840 U.S. dollars (or $10,000 Canadian dollars divided by the retail exchange rate of 1.27551). Seems okay so far, right?

But how much are those $7,840 U.S. dollars really worth in Canadian dollar terms? If we multiply our $7,840 U.S. dollars by the “fair” corporate exchange rate of 1.25, this gives us $9,800 Canadian dollars. Even if you’re not a math whiz, you may notice that’s $200 Canadian dollars, or 2% less than the $10,000 Canadian dollars we started out with.

See how easy it is for these currency conversion fees to go unnoticed?

If that’s not frustrating enough, you take another hit on the way back, when you sell your VTI shares and convert your U.S. dollars back to loonies. In our 2% currency conversion fee scenario, any benefits from holding VTI instead of VUN in an RRSP would end up being significantly reduced during the measurement period.

The message is clear: The fee and tax advantages of holding U.S.-listed ETFs in an RRSP don’t count for much if your broker gouges you on currency conversion fees in the process.

Currency Conversion Fees in TFSAs

This issue becomes even more onerous in TFSAs, where foreign withholding taxes can’t be eliminated by opting for U.S.-listed U.S. equity ETFs, like VTI, over Canadian-listed U.S. equity ETFs, like VUN. Here, you can get slammed with both the taxes and the hidden fees.

In a perfect world with no currency conversion fees, the lower product costs of VTI vs. VUN would have resulted in slightly more growth for VTI over our measurement period. However, if we assume a 2% currency conversion fee on the front-end purchase and back-end sale of VTI, we find VUN to be a much better option for these account types.

Currency Conversion Fees in Non-Registered Accounts

Last up, there’s our non-registered account comparison. Here, we’ll assume all units of each ETF are sold at the end of the measurement period, and the investor pays taxes at the top Ontario tax rate. If we first assume no currency conversion fees, we find VTI and VUN had similar after-tax growth over the measurement period. But once we tack on a 2% currency conversion fee to the purchase and sale of VTI, we find VUN to again be the superior choice for non-registered accounts.

In future videos, I’ll show you one way you can avoid your brokerage’s steep currency conversion fees, through a strategy called Norbert’s gambit. However, Norbert’s gambit is not without issues of its own. So for now, my advice would be to just stick with Canadian-listed ETFs and avoid U.S-listed ETFs altogether.