For Canadian investors, choosing between the Vanguard U.S. Total Market Index ETF (VUN) and the Vanguard S&P 500 ETF (VOO) depends on several key factors such as diversification, tax efficiency, and currency considerations. Both ETFs are excellent options for gaining exposure to the U.S. stock market, but they cater to different investor needs. Here’s a breakdown to help you make an informed decision.
Executive summary
| Feature | VUN (Vanguard U.S. Total Market ETF) | VOO (Vanguard S&P 500 ETF) |
|---|
| Index Tracked | CRSP U.S. Total Market Index | S&P 500 Index |
| Holdings | ~4,000 (Broad U.S. market) | 500 (Large-cap U.S. companies) |
| Currency | Canadian Dollars (CAD) | U.S. Dollars (USD) |
| Expense Ratio | 0.16% | 0.03% |
| Diversification | Broad market, including small- and mid-cap stocks | Focused on large-cap stocks |
| Tax Efficiency | Potential double withholding in TFSAs and taxable accounts | More efficient in RRSPs due to treaty |
| Best Account Type | TFSA or Taxable | RRSP |
| Currency Conversion | No currency conversion required | Requires USD conversion (use Norbert’s Gambit for efficiency) |
| Ideal Investor | Prefers broad exposure and CAD transactions | Focuses on low costs and large-cap U.S. exposure |
Overview of VUN and VOO
VUN is a Canadian-listed ETF that tracks the CRSP U.S. Total Market Index, offering exposure to nearly the entire U.S. equity market, including large-, mid-, small-, and micro-cap stocks. This means you get access to over 4,000 companies across various sectors. VUN is traded in Canadian dollars, making it convenient for Canadian investors who want to avoid currency conversion fees.
VOO, on the other hand, is a U.S.-listed ETF that tracks the S&P 500 Index, representing the 500 largest publicly traded companies in the United States. While it has fewer holdings than VUN, it focuses on large-cap stocks, which historically drive a significant portion of U.S. market returns. VOO is traded in U.S. dollars and is renowned for its low expense ratio and liquidity.
| ETF | Index Tracked | Holdings | Currency | Expense Ratio | Primary Focus |
| VUN | CRSP U.S. Total Market | ~4,000 | CAD | 0.16% | Broad Market |
| VOO | S&P 500 | 500 | USD | 0.03% | Large-Cap U.S. |
Diversification
VUN provides broader diversification by including mid-, small-, and micro-cap companies, which can enhance long-term growth potential and reduce concentration risk. In contrast, VOO is concentrated in large-cap stocks, which are more established and generally less volatile. However, investors seeking exposure to smaller, growth-oriented companies would miss out with VOO.
If your goal is to capture the full breadth of the U.S. market, VUN is the better option. For those who prefer to focus on the most influential companies driving U.S. economic performance, VOO is ideal.
Tax Efficiency
Tax efficiency is a critical consideration for Canadian investors. Because VUN is a Canadian-listed ETF, it is subject to a 15% withholding tax on dividends from U.S. stocks within registered accounts like RRSPs or TFSAs. VUN also holds U.S.-listed ETFs within its structure, which can lead to additional layering of withholding taxes on dividends in non-registered accounts.
VOO, being a U.S.-listed ETF, avoids this additional layer of taxation when held in an RRSP due to the Canada-U.S. tax treaty. However, if held in a TFSA or a taxable account, the 15% withholding tax applies directly. This makes VOO more tax-efficient in an RRSP, while VUN might be more convenient for TFSAs or non-registered accounts due to its Canadian dollar listing.
| Account Type | VUN Tax Impact | VOO Tax Impact |
| RRSP | 15% withholding on dividends | No withholding on dividends |
| TFSA | Double-layered withholding possible | 15% withholding on dividends |
| Taxable | Double-layered withholding possible | 15% withholding on dividends |
Currency Exposure
Another key difference is the currency exposure. VUN is traded in Canadian dollars, which eliminates the need for currency conversion and reduces costs for Canadian investors. However, it is not currency-hedged, meaning its returns are still affected by fluctuations in the CAD/USD exchange rate. VOO, traded in U.S. dollars, requires investors to convert Canadian dollars into U.S. dollars, incurring conversion fees unless you use strategies like Norbert’s Gambit.
If you plan to hold U.S. dollars for other investments or transactions, VOO may be a more straightforward option. On the other hand, VUN is better suited for investors who prefer the simplicity of transacting in Canadian dollars.
Expense Ratios
VOO has a much lower expense ratio (0.03%) compared to VUN (0.16%). This cost difference can add up over time, especially for larger portfolios. However, the higher expense ratio of VUN is justified by its convenience for Canadian investors, including currency handling and broader diversification.
Which One Should You Choose?
The choice between VUN and VOO largely depends on your investment objectives, account type, and willingness to manage currency conversion.
- Choose VUN if you value broader market exposure, prefer to transact in Canadian dollars, or plan to hold the ETF in a TFSA or taxable account.
- Choose VOO if you want lower costs, focus on large-cap U.S. stocks, and hold the ETF in an RRSP to maximize tax efficiency.
By considering these factors, you can align your investment choice with your financial goals and minimize unnecessary costs or risks.