Should you invest in ETFs on foreign stock exchanges?

Q: My partner and I have saved 1,000 British pounds and 7,000 euros: we were planning to move to Europe, but our plans changed and we’ve decided to stay in Canada. We would like to invest this cash in ETFs on the London Stock Exchange and the Frankfurt Stock Exchange, so we do not want to convert it to Canadian or US dollars. Unfortunately, our brokerage (Questrade) does not offer investment accounts in other currencies. What are our options for investing this money in Canada?


A: It’s possible for Canadian residents to invest in ETFs on overseas stock exchanges, Ann, but before we look at your options, let’s consider whether it makes sense for you to do so.

If you’re simply looking to avoid the normally high cost of currency exchange, I don’t blame you. Banks tend to offer terrible rates on currency conversion. But there are businesses that exchange currencies at much more reasonable rates, so you may be able to reduce this cost considerably if you do some research. Converting your currencies is likely to be the best solution because as we’ll see, the cost of investing your money on overseas exchanges is likely to be much higher.

RELATED: Avoid foreign withholding taxes on international ETFs

As you’ve discovered, the most popular online brokerages in Canada allow you to trade on Canadian and U.S. exchanges only. If you want to trade in London or Frankfurt, you’ll need to open accounts with one of the few brokerages offering access to global markets and allowing you to trade in foreign currencies, such as HSBC InvestDirect and Interactive Brokers. Problem is, you’ll incur significant trading commissions on foreign exchanges, and you may even pay maintenance fees unless the accounts maintain a minimum balance.

That cost might be worthwhile if you had a six-figure account and a genuine need to hold foreign currencies for the long term. But your savings add up to about $12,000 CAD at current exchange rates, and this is not enough to make trading on foreign exchanges efficient. This is especially true when you remember that at Questrade you won’t pay any account fees, and ETFs can be purchased for free.

Finally, investing in foreign currencies is likely to make your recordkeeping a nightmare. Even if you could hold foreign currencies in a TFSA or RRSP, you would need to keep track of the contributions in Canadian dollars. And if you hold your investments in a taxable account, you’ll need to keep track of any capital gains and losses in Canadian dollars, too. This is far more complex than anyone should endure to invest $12,000.

One final note: if what you’re looking for is exposure to the European equity markets and their currencies, you can do that with Canadian ETFs. The iShares MSCI Europe IMI Index ETF (XEU) and the Vanguard FTSE Developed Europe All Cap Index ETF (VE) both trade on the Toronto Stock Exchange in Canadian dollars. But their underlying holdings are denominated in pounds, euros, Swiss francs, and others, so you have exposure to these currencies as well as the stocks themselves. If the currencies appreciate in value relative to the Canadian dollar, you’ll get a boost in your performance. And, of course, when the loonie strengthens, your returns will suffer accordingly.

International diversification is important for Canadian investors, but you don’t need to trade foreign currencies to get that benefit.

Dan Bortolotti, CFP, CIM, associate portfolio manager with PWL Capital in Toronto

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