Two new iShares exchange-traded funds (ETFs) began trading yesterday on the Toronto Stock Exchange. They give Canadians new ways to diversify into foreign stock markets. Coverage that I have seen so far includes pieces by Jonathan Chevreauand Rudy Luukko.
iShares CDN MSCI World Index Fund ( XWD)
- tracks the MSCI World Index, which covers 1,500 stocks from 23 developed markets, including Canada and the United States (but not emerging markets)
- it does this by investing in U.S-based, country-focused iShares ETFs in proportion to the weighting pattern in the MSCI World Index
- MER is 0.45%
- denominated in U.S. dollars (not hedged back to Canadian dollars)
- because invests in a large number of countries, foreign currency exposure will be broadly diversified
iShares CDN MSCI Emerging Markets Index Fund ( XEM)
- tracks MSCI Emerging Markets Index, which cover stocks in emerging countries
- does this by investing inU.S.-based iShares MSCI Emerging Markets ETF ( EEM)
- MER is 0.82%
- denominated in U.S. dollars (not hedged back to Canadian dollars)
- because invests in a large number of countries, foreign currency exposure will be broadly diversified
These new ETFs join the three other foreign-equity iShares ETFs: iShares CDN MSCI EAFE Index, iShares CDN S&P 500 Index and iShares CDN Russell 2000 Index Funds.These three existing iShares foreign-equity ETFs are currency hedged (back to Canadian dollars).
Why notinvest inU.S.-based ETFs instead?
Are the two new ETFs worth investing in? Why not just invest inU.S.-based ETFs tracking the same marketswith lower MERs — like those in the Vanguard group?
The main reason for investing in the iShares ETFs instead of U.S.-based ETFs, as given in the iShares news release,is to avoid estate tax considerations usually associated with U.S.-listed ETFs. This is a reference to the fact that Canadians owning U.S. assets face a U.S. estate tax on those assets in the event of their death.
However, if the value of a Canadians worldwide gross estate is less than $3.5 million (U.S), they are exempt in 2009. In 2010, there will be no limit.
The threshold will come down to $1.78 million (U.S.) in 2011, which includes $780,000 in credits. Another $780,000 U.S. in credits is available if your assets are willed to your spouse. This would bring the effective ceiling to $2.5 million (U.S), which still leaves most Canadians unaffected. It would appear most Canadians thus need not worry about U.S. estate taxes.
Even if one is over the threshold, there are several strategies for minimizing U.S. estate taxes. For example, one can hold U.S. assets in a corporation (as discussed in tax guides such as Tim Cestnicks 101 Tax Secrets for Canadians (2008 edition).
Investing directly in the U.S.-based ETFs also avoids extra tax, according to postsby Canadian Capitalist blogger. As he concludes:
If a Canadian ETF simply holds a U.S.-listed ETF, an additional tax drag is created due to withholding taxes that are not recoverable when the ETF is held within a RRSP account. It may be cheaper, instead, to simply hold the US-listed ETF directly.
Blogs & Comment
Two new iShares ETFs worthwhile?
By Larry MacDonald
Two new iShares exchange-traded funds (ETFs) began trading yesterday on the Toronto Stock Exchange. They give Canadians new ways to diversify into foreign stock markets. Coverage that I have seen so far includes pieces by Jonathan Chevreauand Rudy Luukko.
iShares CDN MSCI World Index Fund ( XWD)
iShares CDN MSCI Emerging Markets Index Fund ( XEM)
These new ETFs join the three other foreign-equity iShares ETFs: iShares CDN MSCI EAFE Index, iShares CDN S&P 500 Index and iShares CDN Russell 2000 Index Funds.These three existing iShares foreign-equity ETFs are currency hedged (back to Canadian dollars).
Why notinvest inU.S.-based ETFs instead?
Are the two new ETFs worth investing in? Why not just invest inU.S.-based ETFs tracking the same marketswith lower MERs — like those in the Vanguard group?
The main reason for investing in the iShares ETFs instead of U.S.-based ETFs, as given in the iShares news release,is to avoid estate tax considerations usually associated with U.S.-listed ETFs. This is a reference to the fact that Canadians owning U.S. assets face a U.S. estate tax on those assets in the event of their death.
However, if the value of a Canadians worldwide gross estate is less than $3.5 million (U.S), they are exempt in 2009. In 2010, there will be no limit.
The threshold will come down to $1.78 million (U.S.) in 2011, which includes $780,000 in credits. Another $780,000 U.S. in credits is available if your assets are willed to your spouse. This would bring the effective ceiling to $2.5 million (U.S), which still leaves most Canadians unaffected. It would appear most Canadians thus need not worry about U.S. estate taxes.
Even if one is over the threshold, there are several strategies for minimizing U.S. estate taxes. For example, one can hold U.S. assets in a corporation (as discussed in tax guides such as Tim Cestnicks 101 Tax Secrets for Canadians (2008 edition).
Investing directly in the U.S.-based ETFs also avoids extra tax, according to postsby Canadian Capitalist blogger. As he concludes:
If a Canadian ETF simply holds a U.S.-listed ETF, an additional tax drag is created due to withholding taxes that are not recoverable when the ETF is held within a RRSP account. It may be cheaper, instead, to simply hold the US-listed ETF directly.