Can you comment on the Schwab U.S. Dividend Equity ETF (SCHD)? I have trouble wrapping my head around the 15-per-cent withholding tax. Do you think this is a good long-term investment?
SCHD has some attractive attributes. The fund’s objective is to track the Dow Jones U.S. Dividend 100 Index, which includes a diversified mix of financials, health care, consumer staples, industrials, energy and consumer discretionary stocks. The ETF has an attractive trailing 12-month distribution yield of 3.3 per cent, and a very reasonable “total expense ratio” of 0.06 per cent.
It’s worth noting, however, that information technology stocks account for just 8.8 per cent of SCHD’s assets (as of Sept. 30). That’s roughly one-quarter of the 33-per-cent technology weighting in the broader S&P 500 Index. So, if you’re hoping to get exposure to tech giants such as Nvidia Corp. (NVDA-Q), Microsoft Corp. (MSFT-Q) and Apple Inc. (AAPL-Q), which have been powering the market’s advance in recent years, you won’t find them here.
The fund’s low weighting in technology helps to explain why its five-year annualized total return (through Nov. 30) of 13.1 per cent trailed the S&P 500′s annualized return of about 17 per cent over the same period. On the other hand, if you’re worried that high-flying tech stocks could be ripe for a tumble, you might consider the fund’s modest tech exposure to be an advantage.
For Canadian investors, there are a couple of other factors to consider before plunging into a U.S.-listed ETF such as SCHD.
First, unless you already have sufficient U.S. cash available, you’ll need to convert your Canadian dollars into U.S. currency to purchase the U.S.-listed units. This can be expensive, as brokers typically charge exchange rates that can cost you 1.5 per cent or more on each transaction.
Second, distributions paid by SCHD may be subject to a 15-per-cent U.S. withholding tax before they land in your account. Under the Canada-U.S. tax treaty, you can avoid withholding tax by holding U.S.-listed ETFs (or individual U.S. stocks) in a registered retirement savings plan, registered retirement income fund or other account that specifically provides retirement or pension income. Unfortunately, the withholding tax exemption does not apply to tax-free savings accounts, registered education savings plans or non-registered accounts.
In a non-registered account, in addition to being subject to withholding tax, SCHD’s distributions will be taxable as foreign income by the Canada Revenue Agency. However, you may be able to claim the amount withheld as a foreign tax credit, which you can’t do in a registered account.
Before purchasing a U.S.-listed ETF such as SCHD, you may wish to consider getting your U.S. equity exposure through a Canadian-listed ETF instead. You’ll still face the 15-per-cent withholding tax, which applies to all Canadian-listed U.S. ETFs regardless of the account type in which they are held. But if you choose a Canadian-listed ETF that trades in Canadian dollars, you can at least minimize the hefty currency exchange costs. That’s because institutions benefit from more favourable currency spreads.
Most of the big Canadian ETF companies offer funds that track the S&P 500 and trade in Canadian dollars. There are even Canadian-dollar ETFs that focus on U.S. dividend stocks, such as the currency-hedged iShares US Dividend Growers Index ETF (CUD) or the non-hedged BMO US Dividend ETF (ZDY). Normally, I choose non-hedged U.S. investments to benefit from currency diversification, but if you’re concerned that the Canadian dollar – which has plunged to less than 70 US cents – might rebound, a hedged ETF is an option to consider.
I own TC Energy Corp. (TRP) in three different accounts with the same broker. When I received shares of South Bow Corp. (SOBO-T) that were spun off from TC Energy in October, each account was assigned a different book cost for the new shares – $33.77 in one account, $21.79 in the second and $23.24 in the third. Do you know how this is possible?
This is not unusual. The book cost – also known as average cost or adjusted cost base (ACB) – of your South Bow shares is a function of the original cost of your TC Energy shares. Presumably, you had different average costs for your TC Energy shares in the three accounts, which would be the case if you purchased them at different times. As a result, the book cost for your South Bow shares is also different in each account.
I always recommend that investors double-check the ACB figures provided by their brokers because mistakes do happen.
I explained how to calculate the adjusted cost base of South Bow shares shortly after the spinoff was completed. The short explanation is that you would allocate 9 per cent of the total original cost of your TC Energy shares in each account to the new South Bow shares in that account, with the remaining 91 per cent allocated to the TC Energy shares.
Keep in mind that the ACB is only relevant for shares held in a non-registered account. You would use the ACB to calculate your capital gain, or loss, when you eventually sell your South Bow or TC Energy shares. Because there are no capital gains taxes in registered accounts, the ACB doesn’t matter in such cases except as a point of interest.
E-mail your questions to [email protected]. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
