#24 – The RRSP Equation

In this episode, the guys tackle the obligatory RRSP discussion and how those focused on FI can use them. If you found this podcast you’re probably familiar with the FIRE movement that has grown in popularity recently. Here at the FI Garage, we’re all on the path to FI, however, we consider the RE part optional.

Beer – Radegast 12 [0:35]
Useful Tool – spaceishare [3:09]

RRSP [8:30]

13 Comments

  1. Interesting show. But Hmmm… whether you buy VUN in CAD or VTI in USD you have the same currency risk. Unless you are buying a currency hedged fund they carry the same risk. VUN just bakes currency swings into the price. So you save approx 0.5pt by buying VTI instead of VUN in the difference in MER and avoiding the 15% on dividend (minus some Norberts Gambit cost). I’m just at the point where it’s become worth it to go through the effort. I wouldn’t do it from the start.

    1. Hi Tara, Completely agree that VTI is worth it when you get into larger investment values. Maybe I’m not thinking correctly about the currency risk? What I was trying to question/answer is the personal currency risk, not within the funds themselves. Hypothetically, If I have $100 CDN today, and I buy VTI with it, I get $80 USD worth. My point is, that in 10-15-20 years, will I sell $80 worth of VTI and get $100 CDN back? I mean it definitely could go either way, I might get $120 CDN or I might get $60 CDN. I’m just thinking this should be a consideration in the decision to exchange the currency, as it is an additional risk. It’s like adding a layer of FOREX to your investing. All this assumes I want to have CDN to spend down the road. Thoughts?

      1. I came here to make the same point as Tara, Tara is right.

        VTI and VUN have the same currency exposure. Unless you specifically buy a currency hedged fund (which I think is a bad idea due to higher fees) you are exposed to the currency fluctuations.

        VTI and VUN hold the same assets, you can check this out on Vanugards pages:

        VTI: https://investor.vanguard.com/etf/profile/VTI
        VUN: https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9557/assetCode=equity/?overview

        Both funds will fluctuate at the same rate due to their underlying assets. VUN will ALSO fluctuate daily as the CAD to USD conversion changes. VIT’s CAD value will change but you don’t see it day to day unless you do a manual conversion.

        Some time in the future if you were to sell both funds at the same time they would yield the same amount when converted to CAD because you are selling the exact same set of underlying assets.

        Buying VTI has an additional cost in currency conversion (even if you do norbits gambit) but it has the withholding tax benefit.

        I don’t remember which episode it is but Ben @ The Rational Reminder had an in depth breakdown of this addressing this specific issue and calling out that you are exposed to the USD in either case.

        1. I’ll have to dig up that episode and listen to it again. Humor me and work through this example. I used data from Yahoo finance and historical exchange rates to try and be as accurate as possible. I have numbers for two dates in question. On May 31, the exchange rate was .743219 and I converted $1000 CDN to USD to buy VTI, which closed at $150.09. On Aug 31st I sold VTI at $151 and converted it back to CDN at .763219, which leaves me with $979.70. Same period, I bought $1000 of VUN at $53.42 on May 31st, then sold those shares on Aug 31st at $54.39 leaving me with $1018.16. What am I missing here?

          1. So…. I think your numbers are wrong.

            I went to google sheets and used the googlefinance() formula to look up closing prices for the days you mentioned and I get different values, I assumed the dates were in 2019.

            Google wouldn’t even give me data for August 31st as it’s a Saturday. When I ran the numbers for May 31, 2019 and September 3, 2019 I get an end value of $1038.39 for VTI and $1037.31 for VUN (both in CAD). I am willing to bet that the difference is due to tracking error between the two funds.

            Really what we are discussing here is, if you own the same asset does it matter what currency it is denominated in. Think of this example. If you bought an ounce of gold does it matter what currency you bought the gold with? No, it is the value of the underlying asset that determines my outcome.

            Another example is to consider a single stock that is cross listed in Canada and the US. For example Telus, T in Canada and TU in the US. On any given day this formula should always be true:
            TU x USDtoCADrate = T

            I put all my math in a google sheet that is shared. Unfortunately for me my Telus example didn’t work on on the first date I picked, Jan 3, 2019 and Jan 3, 2020 but the prices are within a few cents of each other so I’m going to blame the data source.

            https://docs.google.com/spreadsheets/d/1pZvTU81aHQe3cB9ct7p5I94F14Sc850WBFoH_wPgzDA/edit?usp=sharing

          2. I think this is where we are missing each others point. This is not what I’m discussing -“Really what we are discussing here is, if you own the same asset does it matter what currency it is denominated in. Think of this example. If you bought an ounce of gold does it matter what currency you bought the gold with? No, it is the value of the underlying asset that determines my outcome.”

            My point is if I have $1000 cdn today, it is worth $750 USD. 1 ounce of gold is worth $1000 CDN or $750 TODAY. In 10 years (insert arbitrary number) that exchange rate is now .9 instead of .75 how much Canadian do I have if I sell the gold in USD (the value of the gold hasn’t changed) and convert it back to CDN?

          3. Okay, thank goodness we have The Economist in the FI Garage, I think he explained to me what I’m missing. Let’s ignore the examples and picking individual time periods to prove the math. Owning VUN fluctuates in value proportionally in accordance to the current currency exchange rate, in addition to the market value of the underlying assets. Therefore; I’m exposed to the FOREX regardless of whether I’m physically exchanging the currency to buy VTI or just holding VUN. I won’t even get into the possibility of tracking errors. I think we all learned something here, okay, maybe only I did. Thanks for the feedback, hopefully someone else out there is a bit clearer on this now too.

  2. On the topic of ‘is holding in USD to avoid withholding taxes worth it’. In addition to the witholding tax the VTI has a lower MER compared to VUN (0.03 vs 0.16).

    According to an old article from the Canadian Couch Potato the true cost of VTI vs VUN when held in a RRSP is 0.05 vs 0.44
    https://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/

    If I look at Larry Bates T-Rex Score calculator and use the default values below:
    Investment: $10,000
    Annual Return: 6.4 %
    Time: 25 Years

    The difference between .05 and .44 is $4,090 or 12.5% higher returns.

    This is an ideal situation, it doesn’t account for currency conversion fees on both ends. But I’ve run the number and with a long time horizon the 0.39% bump while taking no additional risk is well worth the effort of setting up.

    1. Thanks for the link, and a good example. I think this is a key take-away from that article. “In a large RRSP, therefore, it may be significantly more cost-effective to hold US-listed ETFs for your foreign equity exposure.

      However—and this is important—this is only true if you can avoid the high cost of converting currency. If you’re investing relatively large sums and you’re comfortable doing Norbert’s gambit, then US-listed ETFs are an excellent option. But not everyone is keen to do this: in fact, after we explain the trade-off to clients of our DIY service, many decide they’re happy to pay more for the convenience of trading only Canadian-listed ETFs. And there’s nothing wrong with that decision.”

      I better do some math on the 4 ETFs that I hold, that could be done in USD. Cheers.

      1. I think most people are uncomfortable with investing so I would expect going the extra step for Norbert’s Gambit is not going to happen even for DIY investors. I have use NG 8 times in the last 3 years and at this point I am very comfortable with the transaction but that was not so at first. I did an initial $1000 NG transfer to practice before moving over substantial funds.

        As always I’ve tracked everything in a spreadsheet, my transaction costs range between 0.12% and 0.41% with a average cost of 0.27%. This is a substantial savings over the 1.99% Questrade would charge me.

        I should mention that Questrade has THE WORST foreign exchange fees of the online discount brokers if you do not do NG. milliondollarjourney’s 2020 online broker comparison includes a table showing the foreign exchange fees for each broker, IB wins in that category with 0.01% + $2.50 fee (https://milliondollarjourney.com/review-canadian-discount-brokerages.htm)

        One other thing, NG is not fast (at least on quest trade) the shares you buy must settle before they will journal them over to the USD equivalent. When I am investing in CAD my money is invested the day it hits my account, I still feel slightly unconformable waiting days between when I deposit my funds and when I can finally invest them in USD.

        1. Good info, I have yet to use NG myself. I would definitely do a practice run first. I presume you just used DLR? I have heard there is a waiting period for the trades to settle and then get journaled over and you’ll be exposed to some fluctuation in pricing.

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