Despite a strong home bias, many Canadian investors favor US stocks. The US equity category accounts for nearly a fourth of all Canadian ETF assets. This doesn’t even consider global equity ETFs with US exposure or Canadian investors’ direct investment in US-listed ETFs. US-listed ETFs charge lower fees on average than Canada-listed ones, but investors take on exchange rate volatility for the fee savings.

Investors seeking US stock exposure without a USD balance can opt for Canadian dollar-hedged ETFs listed in Canada to smooth out currency fluctuations. Holding US-listed ETFs in a Canadian brokerage account might also come with additional administrative and transaction costs.

Investors should pay attention to the additional foreign withholding tax they face when investing in international markets. Tax treaties, such as those between the United States and Canada, can alleviate some of these obligations. Still, asset location plays an important role in minimizing tax liabilities.

• In a Registered Retirement Savings Plan (RRSP), investors should hold the US securities directly to avoid any dividend withholding tax. The US recognizes the tax-free status of the RRSP account, exempting ETF distributions from foreign tax withholding.
• In a taxable non-registered account, taxation on ETFs holding US stocks are similar regardless of the ETF’s domicile. For ex-US international stocks, Canadian-listed ETFs that directly hold the underlying foreign stocks enjoy the best withholding tax treatment. Investors can’t claim foreign tax credits from a US-listed ETF holding emerging-market stocks, for instance.
• Holding international stock ETFs in a Registered Education Savings Plans or Tax-Free Savings Account is generally not tax-efficient. Investors cannot take advantage of tax treaties or the foreign tax credit.
• Watch out for Canada-listed ETFs that hold US-listed ETFs. Investors in these funds of funds can be subjected to double taxation.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.