VFV vs VOO – Comparing These Two ETFs in November 2024

ByDan Kent Published On:

Owning a chunk of the S&P 500 is super important for many investors. Even though we have the Toronto Stock Exchange at home, our economy’s too small and too unpredictable to depend on TSX stocks for most of our profits.

However, buying individual US stocks is tricky. If placed in the wrong account, there can be withholding taxes, currency conversion fees, and more.

So for many Canadian investors, they look to skip the individual stock route and simply buy the S&P 500 in a single click through an ETF like VOO or VFV.

However, the difficulty here is that you need to understand the different taxes, expenses, and overall impact of each on your portfolio. Because although these two funds track the S&P 500, they are very different.

In this article, we’re going to help you tackle the differences and similarities between these two funds. So, lets get right into it.

What are VFV and VOO?

These are both Vanguard S&P 500 Index ETFs. They both aim to track the performance of the S&P 500 index, but offer unique approaches based on currency.

Vanguard ETFs are known for their rock-bottom fees, and both of these funds fall under that category, despite one of them having triple the fees over the other.

Lets dive into which one of these funds is right for you.

VFV vs VOO – A head to head comparison of two popular North American S&P 500 Index ETFs

Prior to digging into the differences, lets first talk about the one similarity of these two funds. They both aim to track the S&P 500, and give Canadians exposure to the 500 largest companies in the United States.

Here in Canada, our index is very heavily weighted towards financials, utilities, and material companies. The S&P 500 will give an investor exposure to a multitude of companies in the health care, technology, and retail space, of which we lack at home.

VFV vs VOO – The differences

Holdings

Both of these ETFs contain exposure to 510 companies (yes, there are more than 500 companies on the S&P 500). However, how they get that exposure is key, and will come into play later on in this article.

VOO holds 510 total stocks, including the likes of Apple Inc (AAPL), Microsoft Corp (MSFT), Amazon (AMZN), NVIDIA (NVDA), Alphabet (GOOG), Tesla (TSLA), Berkshire Hathaway (BRK.B), and Meta Platforms (META).

It aims to simply invest and maintain the weightings of the stocks relative to its benchmark index, the S&P 500.

VFV, on the other hand, aims to track the S&P 500 by simply owning one holding, that being VOO.

That’s right. All VFV is is an ETF that holds VOO. So, you’re probably asking yourself right now, why would I ever own an ETF that holds just another ETF, why wouldn’t I buy VOO in all cases?

There are a few reasons. Lets go over them.

Currency

VOO is a US domiciled ETF, meaning it resides in the United States. For this reason, the fund trades in USD.

VFV, on the other hand, is Canadian domiciled, meaning that it trades in CAD and despite owning all US holdings, is a Canadian ETF.

So, the choice to own either of these ETFs may very well come down to the currency you want to buy and sell your investments with. Do you want to keep your portfolio in Canadian dollars, or would you like to not only gain exposure to the S&P 500, but to the currency fluctuations in the US dollar as well?

Fees

Generally, the larger a fund becomes, the less it has to charge in fees. This is because with more assets under management, a fund can charge a lower percentage MER in order to operate the fund.

This is why you’ll see VOO have a MER of 0.03%, while VFV has triple the fees at 0.09%. With only $9B in AUM, VFV pales in comparison to the size of VOO, with $334B in AUM.

This is not all that surprising, as we have a much smaller population than that of the United States. a US domiciled fund tracking the S&P 500 is going to be larger than a Canadian one tracking the same index.

That said, both of these funds have razor low fees. Although 0.03% is practically free, 0.09% is still a rock-bottom management expense ratio for Canadian investors to get exposure to the S&P 500.

Liquidity

Both of these funds are very liquid, with high trading volumes and plenty of assets under management. It’s important to remember that unlike an individual stock, the liquidity of an ETF is not determined by the underlying daily volume of the ETF itself.

Instead, if the underlying holdings are liquid, the fund itself will be liquid. And considering bot these funds contain the 500 largest stocks in the USA, liquidity is no issue.

However, the one difference here will be liquidity in terms of options activity, if that is something you want to partake in. Being a US domiciled fund, VOO is going to have a much larger options market than VFV.

Returns and hedging

You would think with both of these funds tracking the S&P 500 the returns would be nearly identical. However, this isn’t the case, at all, and it has to do with the element of currency fluctuations.

VFV is not hedged. Meaning not only are you exposing yourself to the fluctuations of the price of the S&P 500, but also the differences in currency prices when it comes to the CAD and USD.

Because of a consistently weakening dollar over the last decade, VFV has actually outperformed VOO by nearly 3% annualized. Although this doesn’t seem like much, it is a material difference in returns when it comes to your investment portfolio.

A key note, however. Past returns and currency fluctuations have absolutely no bearing on future returns. The outperformance of one particular stock over another due to operational performance is something you can put some reliance on.

However, an outperformance simply due to currency fluctuations that are outside of anyone’s control is not something you should be putting any sort of reliance on.

Distributions (Dividends)

Both of these funds pay very little distributions, typically having a yield of 1%-1.15%. VOO has the higher dividend yield by about 15 basis points, but these are not funds you purchase for high dividend yields to generate a passive income stream.

Instead, an investor holding these ETFs is likely looking to maximize the total returns of their portfolio.

However, the distribution is key in another piece we’re going to go over, and that is taxes. And, make sure to not skip over this part, as it is quite possibly the most important portion of the article.

Taxes

Although these funds are the same, the tax implications are very different. And, even if you think you have an idea as to how to tax-shelter your US holdings to avoid withholding taxes, these funds are going to throw you for a loop.

You’ve likely been told in order to avoid paying withholding taxes, simply place your US stocks or ETFs inside of your RRSP, and avoid utilizing your TFSA or cash accounts for US dividend paying stocks.

And while this rings true with VOO in the fact you will not pay withholding taxes if you hold this inside of your RRSP, it is not the same as VFV. There is no way to avoid withholding tax on VFV. Even if you place this fund, which contains US holdings, inside of an RRSP, you will be charged withholding tax on the distribution.

Why? It comes down to how the fund is domiciled. The tax treaty between the United States and Canada allows Canadians to avoid paying withholding taxes on US dividend paying stocks if they shelter it in a retirement account like an RRSP. However, VFV is a Canadian domiciled fund, and doesn’t qualify for these rules.

A Canadian listed ETF holding US listed ETFs or stocks is subject to withholding taxes, even in an RRSP, while a US listed ETF or US listed stocks would not be.

The easiest way to explain this is in the chart I created below.

So with that said, what is the better choice?

This ultimately comes down to personal preference. For those near retirement or in retirement living in Canada, they may find it to be a pain to swap currencies back and forth. So, owning VOO may be inefficient, and even in the situation where an investor pays withholding tax on the distribution, it would likely result in less fees because a person doesn’t have to swap USD to CAD constantly.

On the other hand, someone who has a long time horizon and little need to utilize the capital, it may be wise to consider transitioning your CAD to USD and buying VOO. Not only will you pay lower fees, but you will also eliminate the payment of the withholding tax on the fund. And if it’s in a taxable account, you can even file for a foreign tax credit on the withholding taxes you do pay.

Alternatively, for someone who not only wants to own the S&P 500 but wants the safety of currency hedging, neither of these funds may be for you. In this situation, you may want to have a peek at our article on the best S&P 500 ETFs and look at the currency hedged versions.