Ask the Spud: The US-Dollar Couch Potato

We just sold our condo in Florida and now have some money to invest in non-registered accounts. The problem is, the money is all in American dollars. Is there a way to use the Couch Potato strategy using only USD? – John D.



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We just sold our condo in Florida and now have some money to invest in non-registered accounts. The problem is, the money is all in American dollars. Is there a way to use the Couch Potato strategy using only USD? – John D.

It’s certainly possible to build a fully diversified ETF portfolio using only US dollars, but there are a number of important issues to consider.

The first is whether you really need to keep the money in USD. If you don’t plan to make another major purchase in the United States (or if you earn a lot of USD income but all your expenses are in Canadian dollars) it might make sense to exchange most or all the money into your home currency before investing it. Of course, you will need to find a low-cost method for doing this, such as Norbert’s gambit.

You also need to consider your overall asset location. Holding fixed income, Canadian equities, and foreign equities in a non-registered USD account probably isn’t the most tax-efficient strategy. Even if your registered accounts are maxed out, you can still make changes so your fixed income stays in Canadian dollars in RRSPs and TFSAs, and only your equities are in US-dollar taxable accounts.

Let’s consider each asset class in turn:

Fixed income. One of the most important roles for bonds in a diversified portfolio is to lower volatility. For that reason, it is usually unwise to take currency risk with fixed income. Sure, you can buy something like the Vanguard Total Bond Market ETF (BND), but you shouldn’t make it your core bond holding if your expenses and liabilities are in Canadian dollars. However, if you are a long-term investor who ultimately plans to spend your portfolio in US dollars, then a fund like BND may well be appropriate.

If you want to keep US dollars in GICs—which are preferable to bonds in taxable accounts—the options are not very appealing. Canadian financial institutions offer US-denominated GICs, but the rates are generally low. (At ING Direct, for example, business customers get 0.75% for one year and 2% for five years.) What’s more, the “G” in GIC doesn’t apply: US-dollar certificates do not qualify for CDIC insurance. The challenges are similar for US-dollar investment savings accounts: the rates are terribly low (currently about 0.20%) and the products are uninsured.

Bottom line, if your bonds, GICs, and cash are part of a long-term portfolio, it really is preferable to hold them in Canadian dollars.

Canadian equities. It’s quite unusual to find yourself in a position where you’re investing in domestic equities using foreign currency. But if you want to follow the standard Couch Potato strategy of holding about a third of your equities in Canada, there are ways to do so with USD.

One option is to use the Horizons S&P/TSX 60 (US$), which has the ticker symbol HXT.U: it trades on the Toronto Stock Exchange in US dollars. (Before investing in this fund you should understand its swap structure.) If you’re investing in a non-registered account, this is likely to be your best bet because of its extremely low fee and tax-efficiency.

You might use a US-listed fund such as the iShares MSCI Canada (EWC), but this ETF is expensive (from an American perspective, it’s a foreign equity fund) and you won’t be able to claim the dividend tax credit. Because it is a US-domiciled fund, you will receive a T5 rather than a T3 slip, and your Canadian dividends will not be itemized.

An important note about currency risk here: although you are buying in US dollars, the underlying stocks are denominated in loonies. That means if you measure your returns in your home currency it would make no difference whether you held HXT.U or its Canadian-dollar equivalent, HXT. Your returns would be identical.

US and international equity. These asset classes are obviously much easier to access with US dollars, since you can simply use the Vanguard ETFs that are already in the Complete Couch Potato: the Vanguard Total Stock Market (VTI) and Vanguard Total International Stock (VXUS). Another option for US equities is the BMO S&P 500 – US Dollar Units (ZSP-U): like the Horizons fund above, this one trades on the TSX in American dollars.

Finally, if you have a very large portfolio, make sure you stay up to date with US estate tax laws, which changed in early 2013. ETFs listed on New York exchanges are considered “US situs assets,” and therefore may be subject to estate taxes upon your death. However, Canadian-domiciled funds such as HXT.U and ZSP-U are not, even though they are denominated in USD.

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