Thursday, September 6, 2012

Vanguard Canada Introduces 5 New ETFs

Vanguard Investments Canada announced that they are introducing the following 5 new ETFs:

1. Vanguard FTSE Canadian High Dividend Yield Index ETF
2. Vanguard FTSE Canadian Capped REIT Index ETF (based on the FTSE Canada All Cap Real Estate Capped 25% Index)
3. Vanguard Canadian Short-Term Corporate Bond Index ETF (based on Barclays Global Aggregate Canadian Credit 1-5yr Float Adjusted Bond Index)
4. Vanguard S&P 500 Index ETF
5. Vanguard S&P 500 Index ETF (CAD-hedged)

The most interesting of these ETFs to me is number 4, the un-hedged S&P 500 index. My only question is whether there would be a 15% U.S. withholding tax on dividends when it is held in an RRSP or RRIF. Ordinarily a tax treaty between the U.S. and Canada allows RRSP and RRIF accounts to avoid U.S. dividend withholding taxes, but I’m not sure what happens when the dividends are generated within a Canadian ETF. Canadian Capitalist says that this ETF would be subject to a withholding tax.  If any ETF company would be motivated to reduce investor costs, it is Vanguard, but I can't see any easy way for them to prevent this 15% drag on dividends.

6 comments:

  1. If they still deduct withholding taxes, one could hold it in a TFSA. Those aren't subject to the treaty anyway (I think).

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  2. @Lewin: You're right about the tax treaty not applying to TFSAs anyway. So, this new Vanguard S&P 500 ETF would be fine for TFSAs and non-registered accounts.

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  3. How is it any different from spy? What is the mer?

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  4. @OpenSourcePortfolio: The main difference between this new ETF and SPY is that the new ETF would trade in Canadian dollars. Savvy investors know how to avoid the worst currency conversion costs, but many investors pay through the nose.

    We don't know the MER yet, but the management fee is 0.15%. Given Vanguard's history, one assumes that the MER will come in below 0.2%, but we don't know for certain yet.

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  5. I'm confident (like you) U.S. listed ETFs escape withholding taxes in an RRSP or RRIF; I don't see any withholding taxes applied to my VTI or VWO in my RRSP.

    I would assume this would apply to CDN-listed non-hedged products; no withholding taxes in RRSP or RRIF.

    I wonder how many more products are on the way?

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  6. The answer is yes. The new Vanguard S&P 500 ETF trading in Canada will incur a 15% withholding tax when held in RRSP or RRIF accounts. Vanguard cannot do anything about this.

    Thank you for the link.

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