Here in Canada, the Toronto Stock Exchange is a great way to invest in some of the most promising companies in the country.
However, we have some fundamental issues here in Canada when it comes to our stock exchanges. For one, most of the TSX is concentrated in cyclical sectors like oil and gas, materials, and financials. And secondly, our economy is not big enough to justify allocating all of our investment capital to it.
If you are, you are likely missing out on one of the largest and fastest-growing economies in the world, the US Economy.
However, many Canadian investors do not know how to invest in US stocks from Canada. We decided to make a piece to highlight some ways you can gain exposure to US stocks.
How to invest in US stocks from Canada
- Buy US stocks directly from your brokerage
- Buy Canadian Depository Receipts
- Buy Canadian/US listed exchange-traded funds
Buy US stocks directly from your brokerage
Although this is not the simplest way to go about it (we'll get to that in a bit), this is arguably the most common way to buy US stocks in Canada.
The process is quite simple. You locate the US stock you'd like to buy on your brokerage account and buy it. If you have USD in your account, the transition processes like any other. You'll pay your commission, and you will own the US stock.
However, if you have CAD, there is a process you should go through before buying US stocks directly. That process is called Norbert's Gambit.
Why? Well, it will save you a significant amount of fees. Brokerages make a ton of money off currency exchange fees from investors who may not know of alternatives that could save you thousands of dollars depending on how many US stocks you plan to buy.
I'm not going to go over Norberts Gambit much in this article. We have a separate piece that highlights how to perform the fee-saving strategy at almost every major brokerage in Canada. You can read it here.
The benefits of this method: Arguably the most direct exposure. You are not only exposed to the company you buy but also to the USD. Also, you will pay the least fees if you follow a correct Norberts Gambit strategy.
The downfalls of this method: Some investors, particularly those in retirement, may want to keep their currency in CAD. Also, there are times when a weaker Canadian dollar makes this option unattractive, as you are prone to losing money via currency fluctuations.
Buy Canadian Depository Receipts
A new method of buying US stocks in 2023, purchasing Canadian Depository Receipts can give you access to the most popular US equities in Canadian dollars.
What exactly is a CDR? In the simplest terms possible, a trust account holds the US stock itself. From there, you buy a portion of that share in Canadian dollars. Each CDR is fractional ownership of the US stock itself.
The CDRs were started by CIBC and trade on the NEO Exchange. What began as a few simple major stocks have ballooned into almost all of the popular companies on the NYSE and NASDAQ.
You can now buy Apple (AAPL), Amazon (AMZN), Facebook (META), Netflix (NFLX), Microsoft (MSFT), Alphabet (GOOG), Berkshire Hathaway (BRK), and so much more.
In fact, at the time of writing, there are over 35 options for CDRs. When one is debuted, it typically trades around the CAD 20 mark. However, fluctuations in price can lead to differences in price.
There are two main benefits to CDRs. For one, you do not need to exchange currencies. And secondly, the CDRs are hedged, meaning you will be protected from fluctuations in CAD/USD. The disadvantage of this is the fees that come with currency hedging, which can be upwards of 0.6% annually.
Dividends are paid out as if you owned the underlying stock. This also means you have to consider withholding tax, which we will discuss near the end of this piece.
The benefits of this method: No currency conversions and currency hedging.
The downfalls of this method: Limited selection, and annual fees for currency hedging.
Buy Canadian or US listed ETFs
Arguably just as easy as buying US stocks, buying exchange-traded funds at your brokerage can give you access to a broad range of US stocks at the click of a button. Many ETFs trade in CAD and USD, which can expose you to the United States stock market.
There are exchange-traded funds that track the broad indexes like the S&P 500, NASDAQ, or Dow Jones, along with some niche ETFs that may focus on things like capital appreciation, dividends, leverage, or even inverse strategies.
Obviously, with funds comes fees. You will pay annual fees to own these ETFs on top of any currency exchange fees you pay if you buy them in USD. There are also some tax implications of owning CAD-traded ETFs that hold US stocks or ETFs, even in an RRSP. More on that later.
The benefits of this method: Reduces overall risk with the instant diversification many broad-based index funds provide. It can give investors access to thousands of US stocks in Canadian dollars in a single click.
The downfalls of this method: Annual fees, limited Canadian dollar selection, and the fact you could pay withholding taxes even inside of an RRSP, depending on the ETFs structure.
The tax implications of owning US stocks
Most of the tax implications a Canadian resident must consider when buying US stocks comes down to the dividend. If held in a taxable account, capital gains are taxed like usual.
However, if you hold US stocks in a taxable or tax-free savings account, the Internal Revenue Service (IRS) will collect a withholding tax on that dividend. Not to mention, not only will you be charged this withholding tax, but you will not be able to claim the foreign tax credit to recover some of the withholding tax like you could in a non-registered account. For this reason, the TFSA is arguably the worst spot to hold US dividend-paying stocks.
This is why it is generally accepted to put US dividend-paying stocks, or stocks that you anticipate will pay a dividend in the future, inside your Registered Retirement Savings Plan (RRSP).
This is because there is a tax treaty between Canada and the United States where the RRSP is considered a retirement account. As such, US dividends are not charged a withholding tax if held inside an RRSP.
A cautionary note in an RRSP, however. If you own a Canadian-listed ETF that holds US stocks or ETFs, you could also be charged a withholding tax on that ETF's dividend.
Before making any investment decisions, you must speak to an accountant, as the situation can change from investor to investor.
The advantages of investing in US stocks
The most evident advantage to investing in US stocks as a Canadian is that you gain exposure to a larger, more robust economy. With nearly ten times the population, a much larger military, and overall much larger diversification in its GDP, having exposure to the United States is vital to a well-rounded portfolio.
Historically, indexes like the Dow Jones, NASDAQ, and S&P 500 have performed much better than the TSX. This is because our index is heavily concentrated in highly cyclical sectors, and our overall GDP is more focused. This results in our economy lagging in the event of, say, lower oil prices.
The disadvantages of investing in US stocks
One of the main disadvantages of investing in US stocks is that we have to exchange currencies. Buying USD with your CAD can prove tricky, especially in recent times when there have been volatile movements in currency.
Poor timing when swapping CAD for USD can result in your returns being wiped out because of fluctuations in currency. Over the long term, this tends to even out. However, if our time horizon is shorter, this can sting.
Another disadvantage would be overall volatility. Due to high volume and popularity, the US market tends to be much more volatile than the Canadian market. We witnessed this in 2022, as the S&P 500 lost more than 2.5X that of the TSX and the NASDAQ a whopping 4.1X.
What are the best online trading platforms to buy US stocks?
There are many stock trading platforms here in Canada. However, the two I would recommend and utilize are Qtrade and Interactive Brokers.
When it comes to buying stocks, it is hard to argue with the currency conversion fees of Interactive Brokers. However, I view Qtrade as one of the best well rounded brokerages in Canada, and I have utilized the platform since switching from Questrade in 2020.
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