Hello, Canadian investors! Today, we’re diving into a comparison that’s often a topic of interest: VUN vs. VTI. Both are popular ETFs offering the same exposure to the U.S. stock market, but they have some distinct differences that are crucial to understand. Let’s break them down.
Executive summary – VUN vs VTI
| Feature | VTI (Vanguard Total Stock Market ETF) | VUN (Vanguard U.S. Total Market Index ETF) |
|---|---|---|
| Target Market | U.S. investors | Canadian investors |
| Index Tracked | CRSP US Total Market Index | CRSP US Total Market Index |
| Market Exposure | Broad U.S. equity market | Broad U.S. equity market |
| Holdings | Direct holdings of over 4,000 U.S. stocks | Primarily units of VTI, providing similar exposure |
| MER | lower expense ratio, potentially leading to higher long-term returns. MER = 0.03% | higher expense ratio compared to VTI. MER = 0.17% |
| Currency | Traded and valued in USD | Traded in CAD but exposed to USD assets |
| Currency Risk | Not applicable for U.S. investors | Exposed to CAD/USD exchange rate fluctuations |
| Currency Hedging | Not applicable | No currency hedging |
| Trading Platform | U.S. exchanges | Canadian exchanges |
What is VUN?
VUN, the Vanguard U.S. Total Market Index ETF, offers a unique opportunity for Canadian investors. It’s a Canadian-listed ETF, specifically designed to track the performance of a broad U.S. stock market index. This makes VUN an attractive option for those looking to invest in a wide range of American companies.
One of the key features of VUN is its listing on the Toronto Stock Exchange, where it trades in Canadian dollars (CAD). This is a significant advantage for Canadian investors, as it eliminates the need for currency conversion from CAD to U.S. dollars (USD). Investing directly in CAD simplifies the investment process, saving both time and the potential costs associated with currency exchange.
While both VTI and VUN aim to replicate the performance of the CRSP US Total Market Index, there are nuances in their holdings due to their targeted investor base. VTI holds the actual stocks in the index, providing direct exposure to U.S. companies. VUN, on the other hand, primarily holds units of the U.S.-based Vanguard Total Stock Market ETF, effectively making it a “wrap” of VTI for Canadian investors. This structure ensures that VUN investors have similar exposure to the U.S. market as VTI investors, despite the cross-border investment.
For Canadian investors, VUN’s convenience is unmatched. It avoids the complexities of investing in a foreign currency and dealing with the associated exchange rate fluctuations. This ease of investment, combined with the broad market exposure, makes VUN an ideal choice for those seeking a straightforward and effective way to invest in the U.S. stock market.
What is VTI?
VTI, the Vanguard Total Stock Market ETF, stands as a popular choice for investors looking to gain comprehensive exposure to the U.S. stock market. This U.S.-listed ETF tracks the CRSP US Total Market Index, encompassing a wide array of American stocks across various market capitalizations.
A notable aspect of VTI is its listing on American exchanges, where it trades in U.S. dollars (USD). This feature is crucial for Canadian investors to consider, as it involves currency conversion from Canadian dollars (CAD) to USD. While this adds an extra step in the investment process, it also opens up opportunities to directly invest in the U.S. market, which can be particularly appealing for those looking to diversify internationally.
VUN vs. VTI: The Differences
Performance comparison VUN vs VTI
Listing Currency and Exchange:
The difference in the listing currency and exchange of VUN and VTI is a crucial factor for Canadian investors. VUN is listed in Canadian dollars (CAD) on the Toronto Stock Exchange (TSX), offering a straightforward investment process for Canadians. This eliminates the need for currency conversion, avoiding the associated costs and fluctuations in exchange rates. In contrast, VTI is listed in U.S. dollars (USD) on American exchanges. Investing in VTI requires Canadians to convert CAD to USD, incurring currency conversion fees. Additionally, the ongoing fluctuation between CAD and USD can impact the investment’s value and returns.
Tax Considerations:
The tax implications of VTI and VUN are significantly different, especially concerning RRSP accounts. VTI, being a U.S.-listed ETF, is subject to the Canada-U.S. tax treaty. This means that when VTI is held in an RRSP, it benefits from the treaty’s provisions, potentially making it more tax-efficient. The treaty reduces the withholding tax on U.S. dividends, a benefit not applicable to VUN, as it is a Canadian-listed ETF.
Expense Ratios:
VUN MER = 0.17%
VTI MER = 0.03%
VTI generally boasts a lower expense ratio compared to VUN. An expense ratio is an annual fee expressed as a percentage of the fund’s total assets and is deducted from the fund’s assets, affecting its overall return. VTI’s lower expense ratio can make a significant difference in long-term investment returns, as lower costs typically translate to higher net returns for investors.
Dividend Withholding Taxes:
When it comes to dividend withholding taxes in non-RRSP accounts, VTI and VUN differ. For Canadian investors holding VTI in non-RRSP accounts, there’s a U.S. dividend withholding tax. This tax reduces the dividend amount received from the investment. VUN, on the other hand, does not attract U.S. dividend withholding taxes in non-RRSP accounts, as it’s a Canadian-listed ETF. This can be a crucial factor for investors when deciding between the two ETFs, particularly if they plan to hold their investments in taxable accounts.
Which One Should You Choose?
The choice between VUN and VTI depends on several factors:
- Currency Preference: If you prefer to trade in CAD and avoid currency conversion, VUN is suitable.
- Account Type: For RRSPs, VTI might be the better choice due to tax efficiency.
- Cost Considerations: Consider the impact of expense ratios and potential withholding taxes on your investment returns.
Conclusion
Both VUN and VTI offer Canadian investors great ways to invest in the U.S. stock market. Your choice should align with your investment strategy, currency preferences, and account types. As always, it’s important to do your own research and consider consulting with a financial advisor.
Remember, knowledge is power in the world of investing. Stay informed and invest wisely!
Disclaimer: This content is for informational purposes only and is not intended as investment advice.
