XUS vs IVV: Which ETF Is Best?

As a Canadian investor seeking broad market exposure to US stocks, it is important to use the most appropriate ETF for your objectives based on your account type and transaction size. But, Canadian investors have several S&P 500 ETFs available including many duplicate Canadian versions of US ETFs. So, which S&P 500 ETF is best for Canadian investors? XUS vs IVV or VOO or something else? And, what are the criteria investors should use when making this determination?

XUS vs IVV: Which is Best?

This post will compare XUS vs IVV, two S&P 500 ETFs, even though there are many S&P 500 ETFs for Canadian investors to choose from. XUS is the iShares Core S&P 500 Index ETF traded on Canadian exchanges in Canadian dollars. While IVV is the same iShares Core S&P 500 Index ETF traded in the US in US dollars.

XUS vs IVV: Just Two of Many

XUS and IVV are just two of the many S&P 500 ETFs available to investors. In fact, our family office tracks a list of almost 40 S&P 500 ETFs. Contact us if you’d like access to our curated list of ETFs we use.

What Matters?

For simplicity’s sake, this post will compare XUS vs IVV only. The same principles apply to choosing any ETF.

Choosing whether to own XUS vs IVV should be based on a few different criteria. The three most important are 1) the fees each fund charges (or their Management Expense Ratio “MER”), 2) whether you’ll incur foreign exchange fees, and 3) the transaction costs associated with your account. There are other estate planning considerations that apply to some wealthy investors which will also be discussed. And, there are some minor liquidity considerations based on the size of each ETF.

XUS vs IVV: Fee Comparison

When comparing XUS vs IVV, the biggest and most important consideration is the MER of each ETF. The MER is the annual fee that is embedded into every ETF. In the case of XUS vs IVV, investors pay this management fee to iShares for creating and managing each fund.

Overall, the fee is very low for both XUS and IVV, but one is significantly higher than the other. The MER for XUS is 0.09% and the fee for IVV is 0.03%.

This means investors in XUS are paying 3x the fees compared to investors in IVV. Why?

The difference occurs because the scale of IVV is much larger than XUS. IVV is based in the US and has a much larger investor base. XUS is usually most suitable for Canadian investors with specific foreign exchange preferences and estate planning needs.

For example, Canadian listed XUS has assets of $6.8 billion (CAD) compared to IVV at $500 billion (USD). The larger the fund, the lower the ETF fee might be because the issuer can spread fixed costs over a larger investor base. Fund size might also impact the bid/ask spread quoted on exchange when buying or selling (but that embedded fee will be minor).

Are We Splitting Fee Hairs?

Even though XUS is 3x more expensive compared to IVV, does it matter? For the average investor, probably not. But, a fee is still a fee. And, any fee is a drag on returns. With a $10,000 investment the annual difference is $9 (XUS) vs $3 (IVV). On $100,000 its $90 vs $30. And, on $1 million the difference is $900 vs $300.

In terms of MER, IVV beats XUS.

Foreign Exchange Costs

The next most important consideration for investors when comparing XUS vs IVV is the foreign exchange costs. Canadian investors need to obtain US dollars to buy IVV. This means their broker or bank will charge a fee for their foreign exchange service. Typically, this might amount to 1.5% of the value of the foreign exchange transaction as is the case with Wealthsimple.

As you may notice, a fee of 1.5% is more than 16x higher than the MER of 0.09% attributable to XUS. So, investors would need more than 16 years to re-coup the cost of making a foreign exchange transaction on Wealthsimple to buy the cheaper IVV instead of XUS.

Now, many Canadian investors choose to hold US dollars as part of their investment portfolio for the long-term. So, if you’re a young investor with a time horizon of a few decades then a case can be made for converting Canadian dollars into US dollars to hold cheaper American versions of the same Canadian ETFs. But once again, the choice is not obvious and depends on your holding term.

XUS vs IVV: Transaction Costs

The third most important consideration about whether to choose XUS vs IVV is the transaction costs. Some brokers, like TD Direct Investing, charge transaction fees up to $10 per trade. Others, like Wealthsimple and TD Easy Trade, don’t charge explicit transaction fees at all. Then, there are brokers like Questrade, which don’t charge fees to buy ETFs but do charge fees up to $10 per trade to sell them.

So, when you’re deciding which ETF is best for you, investors need to consider the type of brokerage account they’re using. And, whether you’re paying transaction fees. If you’re buying small amounts at a time, then you may be more suitable for a no-fee brokerage like Wealthsimple. But, if your transaction size is larger, then you may prefer the advanced order entry capabilities of brokerages that may charge transaction fees.

In other words, $10 for a $200 transaction means a lot more compared to $10 for a $1 million transaction.

Estate Planning Considerations

Wealthy Canadian investors choosing ETFs should also pay close attention to the domicile and holding structure of the ETFs in their portfolio as the legal domicile and the ownership structure of an ETF portfolio can have important tax consequences on high value estates (+$10 million).

For example, Canadian investors using Canadian ETFs holding US stocks can typically avoid some US estate tax triggers. But, when these same investors hold US situated ETF versions, they may be exposing themselves to US estate tax. And, it also matters whether these same ETFs are held by corporate entities or trusts. It’s a complicated topic demanding expertise. Click here to learn more about the US estate tax for Canadian investors.

XUS vs IVV: Which ETF is Best for Canadian Investors?

Choosing the best S&P 500 ETF for Canadian investors involves evaluating multiple factors including fees, foreign exchange costs, and transaction expenses. XUS and IVV each offer unique benefits, but the decision ultimately depends on your specific investment needs and circumstances of each investor.

Fees are a significant consideration, with IVV generally offering a lower MER compared to XUS. However, foreign exchange costs and transaction fees significantly alter the choice.

So, What Next?