In Episode 8 of the Canadian Portfolio Manager Podcast, Justin starts off by answering a listener question regarding the currency exposure of two U.S. equity ETFs in the CPM model portfolios. Steven Leong, of BlackRock Canada, also drops in to provide his currency insights throughout the episode. We then embark upon a most excellent currency adventure with Bill and Ted – two pals who are trying to wrap their heads around the confusing world of currencies. The currency exposure of international, emerging markets, and the iShares “dot U” equity ETFs are also examined. Finally, we end the show with an ETF Kombat between XUU.U and ITOT (two U.S. equity ETFs that both transact in U.S. dollars).
- Our brains as humans are not fully wired to handle foreign currency calculations [0:00:31.8].
- Ask Bender: Marc from Ottawa kicks things off by asking what the currency exposure is when investing in XUU and ITOT [0:02:24.8]
- Understanding the currency exposure of your U.S. equity ETF [0:04:02.8]
- The key currency takeaway from episode 8 [0:05:20.8]
- A quick tip on how to wrap your head around currency quotes [0:06:22.8]
- How to account for currency fluctuations when calculating your stock market returns [0:08:54.8]
- Why a positive 10% stock market gain and a negative 10% currency loss do not net out to 0% [0:11:10.8]
- Bill & Ted’s Excellent Currency Adventure [0:12:52.8]
- Understanding the currency exposure of your international equity ETF [0:15:52.8]
- Understanding the currency exposure of your emerging markets equity ETF [0:21:20.8]
- Introducing the iShares “dot U” equity ETFs [0:22:48.8]
- Understanding the currency exposure of your iShares “dot U” ETFs [0:23:29.8]
- Why you can’t use the iShares “dot U” equity ETFs to perform the Norbert’s gambit strategy [0:25:49.8]
- ETF Kombat: XUU.U vs. ITOT (featuring PWL’s own Martin Dallaire as the voice of the judge [0:29:24.8]
Blog posts/resources discussed in this episode:
CPM PODCAST EP.8 – Making Cents of Your ETF’s Loonie Currency Exposure – SCRIPT
Hi Justin. I have a completely unrelated question but don’t know how else to reach you. I have a GIC maturing this month in my RRIF. Usually, I would reinvest most of it in a 5-year GIC to maintain the ladder I set up a few years ago. However, rates are so low now I’m hesitant to do so. What alternatives would you suggest? Many thanks for your input!
@Lynn: Although GIC rates are extremely low right now, the alternatives are not better. A short-term bond ETF (like XSB) is currently yielding 0.71% after product fees and has an average maturity of 3 years. A broad-market bond ETF (like XBB) is currently yielding 1.24% after product fees and has an average maturity of 5 years.
If you have no other use for the funds (i.e. cash flow requirements, portfolio rebalancing), I would just stick with your plan (as we can’t accurately predict where fixed income yields will be in the short-term).
There is a couple things you missed on the comparison other than XUU(.U) higher (0.03 vs 0.07) cost is 1) the dividend is almost 1% higher for ITOT and 2) the liquidity doesn’t even compare. I will almost always buy the NYSE version for the liquidity and higher returns.
@Doug: On your first point, your distribution yield comparisons are inaccurate.
The 12-month yield for ITOT is showing 2.04% as of May 29, 2020. The 12-month yield for XUU is 1.19% as of July 2, 2020 [we can’t compare XUU.U’s 12-month yield, as it hasn’t been in existence for a year yet, but since it is equivalent to XUU (other than trading in U.S. dollars), this is irrelevant]. I’m assuming these are the two figures you’re comparing when you state that “ITOT’s dividend is almost 1% higher than XUU(.U)”.
You’ll initially notice the two dates are different (May 29th and July 2nd, 2020), so we will need to use the same NAV per share date for our comparisons (I’ve used June 30, 2020 for the discussion below).
The NAV per share of XUU on June 30, 2020 was $31.540239 CAD. XUU’s distributions over the past 12 months add up to $0.51779 CAD per share. Dividing $0.51779 by XUU’s NAV per share of $31.540239 CAD gives us a 12-month distribution yield of 1.64%.
The NAV of ITOT on June 30, 2020 was $69.534024 USD (converted to CAD at 1.3628, ITOT’s NAV per share is $94.76096927 CAD). ITOT’s quarterly distributions over the past 12 months were:
– September 30, 2019 = $0.321753 USD (or $0.4260974979 CAD @ 1.3243 FX rate)
– December 20, 2019 = $0.445775 USD ((or $0.58681821 CAD @ 1.3164 FX rate)
– March 31, 2020 = $0.269137 USD ((or $0.3818246619 CAD @ 1.4187 FX rate)
– June 19, 2020 = $0.275536 USD ((or $0.3743707632 CAD @ 1.3587 FX rate)
Therefore, ITOT’s distributions per share over the past 12 months were $1.769111133 CAD. But, remember that ITOT’s quoted distributions are gross of the 15% U.S. withholding taxes, while XUU’s distributions are net of the 15% U.S. withholding taxes. To make the figures comparable, we’ll need to take ITOT’s gross distributions of $1.769111133 CAD and multiply it by (1 – 15%), giving us $1.50374446305 CAD after withholding taxes. Dividing $1.50374446305 CAD by ITOT’s NAV per share of $94.76096927 CAD gives us a 12-month distribution yield of 1.59%.
So as of June 30, 2020, XUU had a 12-month distribution yield of 1.64% and ITOT had a 12-month distribution yield of 1.59% (almost identical).
On your second point, it is true that the popular U.S.-based BlackRock and Vanguard ETFs tend to have higher share prices (and therefore, tighter bid-ask spreads when comparing similar one cent or two cent spreads between XUU.U and ITOT). However, for a long-term investor, this is not expected to add much to their overall cost (so I didn’t feel like it was worth mentioning).
Justin, you are truly amazing. Of all the information out there, I have learned more from you than any other source. Thank you for taking the time and effort to bring this information to us. It is truly amazing what you do.
I would not have even considered doing what you did with the dividend calculations and that obviously separates the pro’s from most of the rest of us. Your thoroughness is amazing.
My iShares research shows that XUU’s fact sheet has a 12 month trailing yield of 0.88% as of May 29th and ITOT’s web page shows a 12 month trailing yield of 2.04% on May 31st. What would your calculations show if you went back to the end of May instead of June? Is the “trailing yield” calculation what you were doing I have seen different variations. Is converting to CDN$ required for calculating dividend yield?
You lost me deducting 15% of ITOT’s dividend in your calculations as I didn’t think it was a factor in any account other than a TFSA. My dividends (eventually) match what is published so I have to believe iShare’s numbers….until I give up and knock on your door.
My mention of the liquidity (I probably should have used the term volume) was not because of the usually larger spread on lower volumes but of just being able to trade my shares if I had to. RBC shows XUU.U’s average volume to be only 1818 shares daily and as of 3:00 today, everywhere I look shows 10 (ten) shares traded but that must be a glitch? Regardless, an average of 1818 shares a day is a negative when trading a $23 stock.
I have found that Canadian versions of US funds have ALMOST ALWAYS had lower dividends, lower volumes and liquidity and I thought that if you are comparing those products in your podcast, they should be mentioned along with the higher cost.
Keep up the great work Justin.
https://www.ishares.com/us/products/239724/ishares-core-sp-total-us-stock-market-etf
https://www.blackrock.com/ca/individual/en/literature/fact-sheet/xuu-ishares-core-s-p-u-s-total-market-index-etf-fund-fact-sheet-en-ca.pdf
@Doug: I’m so glad you’ve found the information useful! You’ll forgive me if I don’t crunch the numbers again for May 2020 (it’s not much fun, and will not “yield” a different conclusion – pun intended). Once the difference in withholding taxes and currencies are accounted for, a Canadian-version of a U.S.-based ETF should only have lower distributions if the product fees are significantly higher (or perhaps if there is a relatively large inflow or outflow of fund assets at just the wrong time, which could impact the distributions per share for the remaining investors and skew the results).
Personally, I was a little disappointed that you only went to 10 decimal places.
@Dan Bortolotti: I ran a back-test, and confirmed that 10 is the optimal number of decimal places for these types of calculations.
Hey Justin,
Thanks a bunch for this, your timing is always impeccable!
Had a quick question with regards to the currency exchange of USD and CAD. We have been slowly approaching your Ludicrous Portfolio, and are in the process of buying the USD iShares ETFs in our RRSP.
We currently have about $5000USD sitting in an American based bank account, and have been looking for the best possible solution to transfer this into our Brokerage (Questrade).
We’re completely comfortable with Norbert’s Gambit, but to convert USD to CAD to transfer to Questrade, then to use Nortbert’s Gambit to covert it back seems really counter productive.
Do you have any recommendations? Or is this the best way to go about it?
We have been looking into opening a new Canadian based USD account like RBC or TD (which we had those accounts before). Someone had also recommended “Shift Connect” to us, which is an online currency exchanger based out of Alberta.
Thanks a bunch in advance, and great podcast! Absolutely enjoyed the pairing of the Youtube video as well.
@Fitz: I’m glad you enjoyed the podcast/video! Unfortunately, most U.S. banks are going to charge you for wiring over U.S. funds to your Canadian-domiciled USD brokerage account, which could outweigh any advantage of keeping the funds in USD.
I’m going to toss this question out to all CPM blog readers – does anyone have any experience/suggestions for Fitz?
Thanks for the response Justin, I’ve done quite a lot of reading, and seem to have come up with a solution!
On a related note to USD funding, once we invest our USD cash, we will proceed with Nortbert’s gambit. There is a quick question with respects to the Ludicrous Portfolio if you don’t mind;
I’m sure I need to read through your post and re-listen to the podcast, but with have the USD holdings of ITOT/ IEFA/ IEMG in the RRSP, what was the reason for keeping XBB in the RRSP? Was it for the maximum growth potential and efficiency of have a 100% equity holdings in the TFSA?
That would make sense now that I think about it, just because having 3 US funds there will have me working with both currencies within the portfolio. I also just realized that XIC is there as well, would it be possible for you to share your thoughts on the 2 Canadian/ 3 USA ETFs split?
As a side note, I’ve also opted to hold ZAG over XBB just because of their slight difference in numbers.
Thanks again in advance Justin, really appreciate it!
*but with the USD holdings of ITOT/ IEFA/ IEMG
**2 Canadian/ 3 USA ETFs split? Especially with XIC also being held in the TFSA as well.
@Fitz: For the Ludicrous portfolios, prioritizing equities in the TFSA first and the RRSP second is expected to increase your future after-tax portfolio value (mainly because you are taking more after-tax equity risk).
U.S.-based foreign equity ETFs result in lower product costs and foreign withholding taxes than their Canadian-based counterparts when held in an RRSP.