How to Buy US ETFs in Canada: 3 Practical Approaches

Investing in US ETFs can seem intimidating at first, especially because you will need to deal with US dollars. There was over $5 trillion invested in US ETFs in 2020, so many Canadians want to get in on the action.

The US has a large number of low-cost ETFs that have performed well over long periods of time.

Our guide will show you three ways to include US ETFs among your investments, to make sure that the US market is part of your portfolio.

The three approaches to buying US ETFs in Canada include:

  • Through a discount brokerage, where you manage your own investments
  • Using a robo-advisor that includes them in your portfolio
  • Through an investment advisor or a portfolio manager

Approach 1: Buying US ETFs through a discount broker

Buying US ETFs through a discount broker

You’ve made the decision to manage your own investments, likely because you want to keep fees low or because you enjoy being in control of your money. The steps for purchasing US ETFs in your investment accounts are:

Step 1: Open an account at a discount brokerage
Step 2: Research which US ETFs you would like to include in your portfolio
Step 3: Convert your Canadian dollars to US dollars
Step 4: Purchase the US ETFs

4 steps to buying US ETFs through your discount broker

1) Opening a discount brokerage account

There are a lot of great choices in Canada when it comes to discount brokerages. If you are looking for low-cost options, we recommend checking out Questrade or Wealthsimple (U.S dollar account is available through Wealthsimple Trade Plus subscription).

For experienced investors, you may also want to consider Interactive Brokers.

Regardless of which broker you choose to use, the first step is to open up the specific account you will be using to invest.

Most brokerages allow you to invest with US dollars and Canadian dollars, but always double check that your account is set up properly.

Make sure to also look at the currency conversion fees for each discount broker, before opening an account.

Depending on which account you are opening, there may be tax implications involved with buying US ETFs, which we will cover later on.

2) Research which US ETFs to buy

Two big advantages of investing in US ETFs are that they are usually very low cost, and the investment universe is massive.

Before making any decision around investment products, take some time to consider several things:

  • How willing and able are you to take risk?
  • When is the earliest you would sell your US ETF?
  • Are there specific risks involved with the ETF?
  • Are there lower cost alternatives available?
  • What is the size of the ETF? Does it trade well?

When purchasing US ETFs through a discount broker, you are becoming your own portfolio manager. A well diversified portfolio will include ETFs across different asset classes.

The ETFs that you choose for your portfolio should fit your risk profile and your investment objectives.

Key consideration: Lower cost alternatives

If you are fee-sensitive and want to minimize how much you are paying for your ETFs, keep in mind that similar or identical US ETFs can exist. Here are two examples of US ETFs that track the S&P 500 Index:

SPY – management expense ratio of 0.0945%
IVV – management expense ratio of 0.03%

Learn about the difference between SPY and IVV here.

Key consideration: Size of the US ETF and how it trades

Since ETFs have exploded in popularity, there are now a few thousand listed ETFs in the US alone.

You have likely heard about some of the larger listed US ETFs. The reality is that most of the ETFs in the US are small, and can cause problems for investors.

An ETF trades like any ordinary stock – it has a bid and ask price. Larger ETFs that are frequently traded have a very tight bid-ask spread. Smaller ETFs may have a big difference between their bid price and their ask price.

Keep in mind that this is a cost for you as an investor, and it’s paid both when buying and selling.

Make sure to write down the ticker of your US ETFs, as well as the exchange that they trade on. US ETFs can have similar tickers to other stocks, or other investments on different exchanges.

Now that you’ve done your research and put together a list of US ETFs that work for you, it’s time to move to the next step.

3) Converting Canadian dollars to US dollars

US ETFs will always be purchased with US dollars, regardless of your account type.

If you have opened an account entirely with Canadian dollars, most discount brokerages will still allow you to buy a US ETF directly. You can search for a US ETF through your discount brokerage and click on buy.

The brokerage will automatically convert your money to US dollars to complete the purchase.

This is not always the best idea, as discount brokerages charge fairly high conversion rates. You may not even notice the fees, considering how easy the platforms have made it to purchase US ETFs and securities.

The fees often range from 1.5% to 2.5%. Also, it is very important you choose a discount broker with a U.S dollar account, otherwise for every transaction you’ll get hit with an FX fee.

One way to potentially reduce the amount of fees that you are paying for Canadian to US dollar conversion is through Norbert’s Gambit.

What is Norbert’s Gambit

Norbert’s Gambit is a strategy for converting Canadian dollars to US dollars, or vice versa. It can make sense in certain situations, and save you quite a bit in conversion fees.

Instead of paying a conversion fee of 1.5% or 2.5%, you are only paying for two trades – a buy and a sell.

The three steps involved with Norbert’s Gambit are:

  1. Purchasing a security (usually DLR.TO and DLR.U.TO) that trades in both US and Canadian dollars
  2. Calling your broker and asking them to “journal” the security to the other currency
  3. Selling the security, which is now in the other currency, once it settles

Learn about Norbert’s Gambit here, using Questrade as an example. It also outlines the potential risks of the strategy. If currency markets are stable, and you are looking to convert a large amount of money, this strategy can save you quite a bit in fees.

Switching currencies manually
Switching currencies manually

You can also convert between US dollars and Canadian dollars for specific amounts. Each discount brokerage has a different platform, but it can always be done online or over the phone.

Keep in mind that these trades also cost the same currency conversion fee as if you were to purchase a US ETF directly.

4) Purchasing the US ETF(s)

Once you have converted a specific amount to US dollars, or used Norbert’s Gambit, the next step is to place the trade. US ETFs are generally purchased in two ways, although we highly recommend one way over the other:

  1. Placing a market order when buying or selling
  2. Placing a limit order when buying or selling
Using a market order

The market order is the most basic type of order. You enter the ticker of the US ETF you would like to purchase, select market order, and click buy.

The purchase is done almost instantly, which is the main benefit of this approach. The drawback is that you have no control over the purchase price.

The purchase price for a market order – a hypothetical example

Let’s assume you are looking to buy 50 units of an imaginary US ETF, ABCD. Your screen shows that it is currently trading at an asking price of $10 USD.

You want to purchase 50 units, for about $500 USD (ignoring fees). What you may not be able to see, is how many units are for sale at $10 USD.

The market for the ABCD ETF may look like this:

10 units for sale at $10 USD
10 units for sale at $11 USD
10 units for sale at $12 USD
10 units for sale at $13 USD
10 units for sale at $14 USD

At this point in time, placing a market buy order for 50 shares would buy all of the above, despite only showing that the asking price is $10 USD.

This means that your average cost for the purchase would be $12 USD per ETF unit – 20% higher than you initially thought.

In this exaggerated example, the ABCD ETF would be a very small and illiquid ETF. The discrepancy in price for a large ETF will likely be much lower, but can still be significant.

To avoid this problem, let’s consider the limit order.

Using a limit order

The limit order is your safest option when buying US ETFs. This type of order lets you put in a maximum price (for buying) or a minimum price (for selling).

You will never spend more than what you have input into your trade screen for a limit order.

The main drawback of using a limit order is that you may not purchase as many units of an ETF as you would like. In the above example, let’s assume you placed a limit order for 50 units of ABCD ETF at $10 USD.

You would only purchase the first 10 units at $10 USD, and the order would remain open.

In this example, the maximum price you are willing to pay for the ETF is $10 USD. The order remains open typically for one day, but can be adjusted to be as long as 90 days in some cases.

If no one else is selling the ETF at $10 USD, your order will expire, and you will only invest a portion of your money.

If the ETF drops in value below $10 USD, your order will start purchasing units until you have 50. In some cases, if a drop is very sudden, you may even be able to buy at prices below $10 USD. Keep in mind that the $10 USD limit order tells you the maximum price.

The reverse is true for selling. A limit sell order means that you will try to sell your shares for the minimum price included in the order.

A best practice is to always use limit orders when buying US ETFs.

Approach 2: Owning US ETFs through a robo-advisor

Owning US ETFs through a robo-advisor

Investing through a robo-advisor is becoming more and more popular. Think of it as a low-cost alternative to an investment advisor or portfolio manager. Questrade offers Questwealth, and Wealthsimple offers Wealthsimple Invest.

When these robo-advisory platforms put together a portfolio for you, it may contain US ETFs. Their investment selection is usually based on your answer to their questionnaires.

Learn more about the pros and cons of robo-advising.

Approach 3: Purchasing US ETFs through an investment advisor

Purchasing US ETFs through an investment advisor

US ETFs can also be purchased through your investment advisor or portfolio manager. Your investment advisor can manage your money on a discretionary basis, depending on his or her experience.

A discretionary money manager will trade in your account for you, without calling you to confirm trades. They may be buying US ETFs for you, across your accounts.

A non-discretionary money manager will be calling you to confirm trades over the phone. They may recommend some US ETFs, or you can let them know that you would like to purchase some.

The fees for working with an advisor are usually high, and we do not recommend this route.

Can I buy US ETFs in my TFSA?

Can I buy US ETFs in my TFSA?

You can buy US ETFs in your TFSA account(s), but it can be a bad idea from a tax perspective. Dividends on US ETFs and stocks are taxed roughly 15% automatically, despite being in your TFSA.

This US withholding does not apply to RRSP account(s), so make sure to buy any dividend paying investments there. An RRSP may be a better account for a dividend-focused US ETF. A TFSA could work better with a non-dividend-focused US ETF.

Learn more about US tax rules and TFSA accounts.

In conclusion

How To Buy US ETFs In Canada

Now that you’ve learned how to buy US ETFs (and maybe even bought some already), remember to watch them over time.

If you’re looking to manage your own investments, check out our helpful guide on which discount broker to use.

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Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Read about how he quit his 6-figure salary career to travel the world here.

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