I have held U.S. dividend equities in my registered retirement income fund at TD Direct Investing for years and have done very well. However, I recently sold half of my U.S. stocks because I am losing faith in the sanity of the U.S. markets and policies. I am also concerned that the U.S. dollar could weaken. I plan to use my U.S. cash to purchase a European dividend exchange-traded fund such as the iShares STOXX Global Select Dividend 100 UCITS ETF (SDGPEX). Will my U.S. cash be converted to Canadian dollars when I make this transaction? Is this a good idea?
I can understand your desire to diversify your portfolio. However, buying SDGPEX is probably not the best way to achieve that, for a few reasons.
First, because SDGPEX is listed on a German exchange, you won’t be able to buy the ETF online as you would a Canadian- or U.S.-listed security. You’ll have to call TD and ask to be connected with a representative who is licensed to trade on an international exchange. Similarly, when you decide to sell, you’ll need to pick up the phone again.
Second, because SDGPEX trades in Europe, your broker will need to convert your U.S. dollars into euros (not Canadian dollars) before it can make the purchase. Brokers typically charge a hefty spread, which can range anywhere from 1 to 2 per cent or more, on currency conversions for retail investors. You’ll need to pay the spread again when you sell, meaning that a $10,000 investment could easily cost you several hundred dollars in currency conversion costs alone.
A third reason I’m not sold on SDGPEX is that there are plenty of similar ETFs that invest in European stocks but trade on a U.S. exchange in U.S. dollars. Purchasing a U.S.-listed ETF with your U.S. dollars will save you currency conversion costs and allow you to execute the trade online yourself.
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As an example, consider the iShares International Select Dividend ETF (IDV). It holds 101 dividend stocks, with the largest weightings in the United Kingdom (about 20 per cent of the ETF’s assets), Italy (10.5 per cent), Spain and France (about 9 per cent each), and Germany (7.5 per cent). Several other European countries are also represented, as are Canada, Hong Kong, South Korea and Australia.
IDV’s costs are reasonable for an international ETF. The management expense ratio is 0.49 per cent, which is higher than most U.S.- or Canadian-focused ETFs, but not egregiously so.
This ETF also generates a healthy stream of income. According to the iShares website, the ETF’s trailing 12-month yield is about 5.2 per cent. As for performance, for the five years ended June 30 the ETF posted a total annualized return, including dividends, of 13.3 per cent. That’s good, but remember that old investing adage: Past returns are not necessarily indicative of future results.
There are plenty of other examples to consider. I recommend that you check the European offerings from Vanguard and other U.S.-based providers offering European and international ETFs that trade on U.S. exchanges. Also keep in mind that the distributions will be classified as foreign income and will not be eligible for the Canadian dividend tax credit.
What’s more, when such U.S.-listed ETFs are held by Canadians, the distributions are subject to 15-per-cent U.S. withholding tax. However, this can be avoided if the ETF is held in a RRIF or other retirement account, as you plan to do.
To broaden your choices, you might also consider European-focused ETFs that trade in Canada. You’ll have to convert your U.S. cash to Canadian dollars to buy them, but because you live in Canada, presumably you’ll leave the proceeds in loonies when you decide to sell. This will reduce your currency conversion costs. You could also look into a currency conversion method called Norbert’s Gambit, which some investors use to save money when swapping Canadian dollars for U.S. dollars and vice-versa.
Two examples (among many others) of Canadian-listed dividend ETFs with significant exposure to Europe are the BMO International Dividend ETF (ZDI), which has an MER of 0.44 per cent and a trailing 12-month yield of about 3.7 per cent, and the Vanguard FTSE Developed ex North America High Dividend Yield Index ETF (VIDY), which has an MER of 0.31 per cent and yield of about 2.9 per cent.
Finally, while your desire to pare back your U.S. holdings is understandable given the chaotic policies emanating from the White House, hopefully this too will pass. Maintaining exposure to the U.S. market, which has many of the world’s leading technology, industrial and consumer companies, is still a prudent long-term strategy.
E-mail your questions to [email protected]. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
