From February 16 to 19, 2010, MoneySense.ca’s top financial planners are answering your RRSP questions. For the full list of questions answered — or to submit a question of your own — click here.
The Couch Potato list of ETFs (or index mutual funds) are listed separately for TSX-listed ETFs (i.e. C$-denominated) and NYSE-listed (i.e. US$-denominated). Is it better to buy all ETFs in the same currency, instead of mixing ETFs in both C$ and US$, for the purpose of easily splitting the money into equal proportions, and then for rebalancing later, for say the Global Couch Potato portfolio?
If I mix ETFs in different currencies, how do I split or rebalance to the desired proportion? Do I convert the FMV of the ETFs to C$ using the prevailing US$ exchange rate, split the money, and convert back to find out how much I need to buy in US$ term for a NYSE-listed ETF, or just simply ignore the exchange rate and treat everything at par value?
I think that makes the whole game so complicated to mix C$ and US$ ETFs, and that definitely takes more than 15 minutes to setup and rebalance as advertised in the MoneySense Magazine. —W.H.
Karin Mizgala: Once you invest in different currencies, you add a degree of complexity to any transaction that you undertake. Typically, from a tax point of view, when you sell a position, you will need to determine the CDN$ equivalent in order to properly declare it on your tax return. You have three ways of calculating the exchange. For both the buy and sell dates, you can use either a) the yearly average b) the monthly average or c) the actual amount paid or received. The trick here is that ALL trades for the year involving the foreign currency must follow either a), b) or c). In other words, you can’t choose to use one method on one stock sale and another method on the next stock sale.
What I would advise is to set up an excel spreadsheet with 3 sections as noted above (Yearly, Monthly, Actual). Record each trade for the year under each section and then calculate the CDN$ value using the above 3 methods. At the end of the year, you will see which method works in your favour using the aggregate of all trades carried out during the year.
From a logistics point of view, how you split and rebalance your positions will be up to you and your advisor. My understanding is that you will need to setup separate accounts for US$ trades and for CDN$ trades. The US$ account will be the one that requires the greater amount of care assuming that it is very active and that there will be continual currency conversions.
So, regardless of whether you buy all ETF’s in the same currency or not, if your purchases are in US$, you will still be converting after every sale. If it’s all in CDN$, you eliminate the extra paperwork that goes with conversion, but you will miss out on any currency gains (or losses) that occur.
Have another idea? Let us know in the comments.