Chad Wood at Mackenzie Investments joins ETF TV to discuss what Canadian investors should know when using ETFs

Presented by Mackenzie Investments.

Margareta Hricova Welcome to ETF TV. Your insight into the world of exchange traded funds, issuers and investments. I’m Margareta Hricova and joining me today is Chad Wood, ETF Strategist at Mackenzie Investments and Deborah Fuhr. Welcome Chad and Debbie.

Chad Wood Thank you.

Deborah Fuhr Thank you. Nice to see you Chad. What are some of the common misconceptions you see investors having when they’re trading ETFs?

Chad Wood One of the misconceptions we see, especially with speaking to end clients, is just what is an ETF. So that one simple you know what a mutual fund is. It’s a basket of securities that is wrapped in a mutual fund wrapper. Just an investment vehicle. An ETF is very similar. It’s just a basket of securities wrapped in an ETF vehicle. So really to the end investor though the same thing. They’re getting exposures to the companies they want to get exposure to. And it’s just the underlying operations that’s a little different. Number two we see quite a bit is around liquidity. So maybe an ETF was just launched. Doesn’t have any assets in it. Maybe is not trading has zero volume. And people will just say there’s no liquidity there I’m not buying it. But if we go out today and launch, say, a US large cap equity ETF that tracks the 500 biggest companies in the United States, the underlying stocks there are very liquid. And that’s what matters the most. So you could easily get your money in and out of that vehicle because of the underlying securities being very liquid. Now number three is around how do you compare two ETFs when it comes to spread. So maybe you have a $10 ETF that has a one cent spread and maybe a $100 ETF that’s the exact same ETF, just a different Nav. And that has a ten cent spread. Well, at first glance you’ll think that one’s ten times better than the other. But when you actually factor in on a percentage basis, they’re the exact same. And that’s something we always tell our advisors is look at a percentage basis when you’re looking at the spread instead of dollar value. So then you actually are comparing apples to apples. Moving on to number four is foreign withholding taxes. And what is foreign withholding tax. Well when you invest in the United States or in foreign securities, foreign equities, there may be a withholding on the dividend. And usually it’s around 15%. And it can get confusing based on the account type. So it’s something that we like to dive in a little bit more when we speak to our advisors.

Margareta Hricova So let’s dive deeper into foreign withholding tax. Can you tell us what people should look out for?

Chad Wood Absolutely. As a Canadian investor, you have to take into account the account type. So is it an RSP? Is it a cash account? Is a TFSA, but also the structure of the ETF. How is the ETF you’re buying built, and is it built from a Canadian investor perspective. And there’s really three types of ETFs. As a Canadian that you can go out and buy to get, for example, exposure to international equity. You can go out in the US and buy an ETF that’s US listed that gives you direct exposure to international. Second way is a Canadian ETF that you buy in the kidney exchange. But that ETF instead of buying the stocks directly just goes and buys a U.S. listed ETF that does that for them. And the third which is the most efficient way. And I’ll get into why is a Canadian listed ETF that goes and buys those international equities for you directly? The questions I want the advisors to ask themselves is am I getting charged withholding tax. But then more importantly, am I being double charged withholding tax. So on that first example U.S. listed, you go out, you buy that. Well, you’re going to get foreign withholding tax from all those foreign countries that it’s investing in. But you as a Canadian will also get a U.S. withholding tax because you bought a U.S. foreign investment. So then you’re left with a double taxation situation, which is not good for your clients because it can be avoided. That second option, where that Canadian ETF you bought that buys US exact same thing. You still are paying the US withholding tax and the foreign countries withholding tax. Now the third option which is a ETF like QEX for example at Mackenzie it’s our international equity ETF. It goes out. It’s Canadian listed. It buys the stocks directly. And you’re only charged the foreign voting tax. So you leave the US out of it. And that saves a lot of money. And it’s something definitely to look out for.

Deborah Fuhr So it sounds like from a tax perspective buying a Canadian domiciled ETF is the best option. Can you help us understand how an investor can be sure that’s what they’re doing?

Chad Wood Number one, what you can do is go to the public websites of these companies. Try and find the holdings data for the ETF you’re buying. The great thing about ETFs is most of this information is public. So you can go find what are they holding. Is it a Canadian listed ETF actually holding the underlying securities or is it holding another ETF. So that’s number one. Number two if you can’t figure this out on your own that’s what I’m here for. That’s what my job is to help our clients go through all this and do the research. So definitely feel free to reach out to us if you have any questions. And then lastly, what I would say is firms like Mackenzie, we’re a Canadian firm first. So we build products from a Canadian perspective and we take into account all these different tax consequences. And we want to make sure that we’re offering the products that are the best for the Canadian investors.

Deborah Fuhr That’s great. Thank you for joining us.

Chad Wood No problem. Thank you for having me.

Margareta Hricova Thank you to Mackenzie Investments for sponsoring today’s episode. And of course, to all of you for watching. To watch prior episodes and to see news from the ETF industry, visit us at ETVTV.net. Thank you.

ETFTV news does not provide investment advice nor recommend products.

Published on February 22, 2024