VFV vs VOO: Which Should Canadians Invest In?

Lady on Computer Comparing VFV and VOO ETFS Performance
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The main difference between VFV and VOO is that VFV is offered in Canadian dollars and is listed on the Toronto Stock Exchange while VOO is offered in American dollars and is listed on the New York Stock Exchange.

Both VFV and VOO are exchange-traded funds (ETFs) offered by Vanguard.

They track the S&P 500 Index, which is composed of the 500 largest publicly traded companies on U.S. stock exchanges.

Both ETFs hold the same basket of stocks that make up the S&P 500 Index and strive to replicate its returns as accurately as possible.

They’re passively managed funds with a focus on keeping fees and expenses low for investors.

Performance

VFV and VOO launched on November 2, 2012, and September 7, 2010, respectively.

Below is a summary of how the two ETFs have performed under different time frames (as of October 31, 2023).

Fund YTD 1 YR 3 YR 5 YR 10 YR
VFV (NAV) +13.06% +11.66% +11.46% +11.77% +13.97%
VOO (NAV) +10.66% +10.10% +10.32% +10.97% +11.13%
Outperformer VFV VFV VFV VFV VFV

Why do the returns differ if both ETFs track the same index? There are several reasons:

  • Differences in MERs
  • Differences in dividend yields
  • Withholding tax on dividends
  • Currency exchange fluctuations between the Canadian and U.S. dollar

VFV has a MER (management expense ratio) of 0.09%, while VOO has a MER of 0.03%.

A smaller MER means it costs less to operate the ETF, which translates to higher returns for the investor.

If you rate the two ETFs using this criterion, VOO has a tiny edge in generating better returns.

However, VOO’s cheaper MER and higher dividend yield are offset by the 15% withholding tax on dividends, which reduces total returns.

Depending on where you hold VOO, you may be eligible to claim some or all of the dividend tax back via the foreign tax credit.

In addition, since VOO is denominated in USD, you have exposure to currency fluctuations as a Canadian, so an additional criteria to keep in mind when deciding between the two.

Holdings

Since both VFV and VOO track the S&P 500 Index, their underlying holdings are nearly identical.

By investing in either ETF, you’ll have exposure to over 500 stocks across a broad range of sectors in the U.S.

However, the two ETFs differ in structure.

VOO seeks to purchase each stock comprising the S&P 500 Index based on its exact weighting.

Conversely, VFV purchases the VOO directly instead of buying each stock individually, so it’s essentially the Canadian version of the VFV.

Here is the fund composition for VFV and VOO:

  • Information Technology (27.49%)
  • Health Care (13.37%)
  • Financial Services (12.75%)
  • Consumer Discretionary (10.68%)
  • Communication Services (8.87%)
  • Industrials (8.31%)
  • Consumer Staples (6.57%)
  • Energy (4.72%)
  • Materials (2.45%)
  • Utilities (2.42%)
  • Real Estate (2.37%)

As of September 30, 2023


 

Here are the top 10 holdings and their percentage of the total portfolio:

  • Microsoft Corp. (7.1%)
  • Apple Inc. (7.1%)
  • Amazon.com Inc. (3.4%)
  • NVIDIA Corp. (2.8%)
  • Alphabet Inc. (2.1%)
  • Meta Platforms Inc. (1.9%)
  • Alphabet Inc. (1.8%)
  • Berkshire Hathaway Inc. (1.8%)
  • Tesla Inc. (1.6%)
  • UnitedHealth Group Inc. (1.4%)

As of October 31, 2023

Tax Treatment

VFV and VOO ETFs are subject to different tax rules, which will impact the total return you earn by investing in them.

A 15% withholding tax applies to any dividends you receive from the fund.

This tax applies whether you hold your VFV shares in a non-registered or registered account.

Under the Canada-U.S. Income Tax Convention (“Treaty”), U.S. stock and ETFs incur a 15% tax on dividends you receive from U.S. corporations.

And since VFV is essentially a “wrapper” that holds the VOO, an American-based ETF, you must pay the withholding tax on all distributions.

As a result of this hefty withholding tax, you’ll realize a significant erosion in your returns should you purchase VFV shares for your investment portfolio.

VOO is also subject to the 15% withholding tax, but only if you hold the shares in a non-registered account or TFSA.

You’ll be exempt from paying this tax if you purchase VOO shares for your RRSP.

The same Canada-U.S. tax treaty that imposes the 15% withholding tax on dividends provides this exception.

Given this preferential treatment, VOO can be more tax efficient if held in an RRSP.

Don’t Forget!

You can claim the foreign tax credit on your tax return to offset the withholding tax you incur from VFV dividends. But keep in mind that you can only claim this credit if you hold VFV in a taxable account.

Hedging

Since VFV is a Canadian-listed ETF holding a U.S. ETF, it’s exposed to currency fluctuations between CAD and USD.

While similar ETFs have a built-in currency hedge to offset this risk, VFV is unhedged.

As a result, any movements in the CAD-USD pair will impact your total return when investing in VFV.

Should CAD appreciate against USD, you’ll lose additional value.

However, if the CAD depreciates, you’ll get an extra boost in value.

On the other hand, changes in the CAD-USD exchange rate don’t impact VOO since it trades in U.S. dollars.

That being said, if you sell VOO shares, you can still lose or gain extra value if you decide to convert your proceeds to CAD.

Frequently Asked Questions

  • How is VFV taxed in Canada?
  • Should Canadians buy VFV or VOO?
  • Is VFV good for TFSA?
Mark Gregorski

Mark is passionate about educating people on how the financial markets work and providing tips to help them better manage their money. Mark holds a bachelor’s degree in finance from the Northern Alberta Institute of Technology and has more than a decade of experience as an accountant.

Outside of writing and finance, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.
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