Canadian Money Forum banner

1 - 16 of 16 Posts

·
Registered
Joined
·
13 Posts
Discussion Starter #1
Anyone know why QQQ (Nasdaq-100 US ETF) outperforms its Canadian equivalents ZQQ and XQQ? - In the last 5 years QQQ has increased by 94.92% while ZQQ and XQQ both increased by only 87.36%

Whatever the reasons, is it a better deal to invest in QQQ and pay the currency conversion fee every time and get a higher return or is it better to invest in the ZQQ or XQQ and not pay the fees but get lower returns?
 

·
Registered
Joined
·
3,944 Posts
Put your account into US dollars and leave it there, and invest in the Qs if you like. That way you profit from the rising US dollar or falling Canadian dollar as well as what you make on your stock trades.That is what I do.
 

·
Registered
Joined
·
13 Posts
Discussion Starter #3
Only problem with that is paying currency fees every time you transfer funds to the account from bank (and back to the bank at a future date) and also you never know if the Canadian dollar is gonna fall or rise. If it rises back to levels it was a few years ago, 25% of your account worth (or potential gains) will be wiped out
 

·
Registered
Joined
·
18,250 Posts
The two ETFs you posted are hedged versions of QQQ that trade in Canada. Hedging introduces an additional performance drag due to various inefficiencies of the derivative process, and I think that's what you're seeing. The drag is significant, about 2% per year here!

Instead, if you use ZNQ (unhedged) the performance should be identical to holding QQQ. It's a relatively new ETF so it's a bit hard to tell, but looking at 6 month performance, ZNQ is up 6.39%. In the same period, the Canadian dollar has not changed at all, and QQQ itself is up 6.38% so it seems to be tracking about perfectly. Beware though, it's a very new ETF and has low daily volume; shouldn't impact much, but use limit orders.

ZNQ should be equivalent to just buying QQQ except it trades in CAD. Yes, you will be exposed to USD currency risk, but that's not a bad thing. It could go in your favour, or against, but is a normal part of foreign investing. And you can see the "cost" of trying to hedge it using those other funds like ZQQ... they're doing about 1% - 2% per year worse than QQQ which is a huge underperformance. It's not worth the cost of hedging.

This cost of hedging has shown up before, for example in XSP versus SPY. Yes, the hedged ETFs remove the USD currency exposure, but do so while killing a huge amount of performance. See https://www.canadianmoneyforum.com/showthread.php/121154-Hedge-or-non-hedged-ETF

I agree that having to transfer cash between CAD/USD for the purpose of trading the US based ETFs can be a bad idea. Unless you have a lot of USD sitting around, you're going to lose money in the currency transfers. So if you want to get as close as possible to "QQQ" while doing the trades in CAD, your best bet will be ZNQ

Similarly, for the S&P 500, the unhedged ZSP and XUS will get you as close as possible to "SPY" while trading in CAD.
 

·
Registered
Joined
·
18,250 Posts
By the way, if you're nervous about the USD exposure you take on when you buy an unhedged ETF like ZNQ or ZSP, think about this...

As Canadian investors, we invest outside the country to diversify. If your primary purpose was just to invest in tech, you don't even have to go outside of Canada. You could buy Canada's XIT, which has a similar 10 year return to QQQ. But admittedly, XIT holds a much smaller portfolio and has poor diversification.

Presumably, you're going to the US for the bigger market and the greater diversification in the NASDAQ 100. Part of the diversification benefit of going outside the country is the currency diversification. If the CAD loses value, the foreign investments give you additional performance.

I've come to see this as a desirable aspect of foreign equity holdings. Think of cases where a domestic currency really plummets, such as Iceland during the financial crisis, or even the UK today. The British Pound is down 25% versus the USD in the last 5 years. Holding unhedged foreign equities is a huge benefit to those investors!

Going forward, nobody can predict currency movements. There is equal probability of the USD going up, or down. Because of the unknown future direction of USD/CAD, the forecasted or average outcome would be 0%. In other words, it can work for or against you and that averages out to "neutral" currency effect.
 

·
Registered
Joined
·
37 Posts
There are at least three reasons why ZQQ will underperform QQQ:
1. Difference in the MER. ZQQ is 0.39% and QQQ is 0.20% for a difference of 0.19%.
2. Foreign withholding tax of 15% on distributions. QQQ has a distribution of 0.781%, so 15% withholding tax would be around 0.117% (although some of that could be return of capital), so call it 0.11%.
3. The cost to hedge USD to CAD. BMO reports an annualized performance since inception of 15.79% NAV versus 16.58% of the index for a difference of 0.79%. Less 0.19% (MER) and 0.11% (withholding tax) would be an average of 0.49% cost to hedge since inception (assuming that there are no other factors).

Take a look at Horizon’s ETF HXQ, which has a slightly better performance than ZQQ, but has a smaller AUM. This ETF doesn't have any distributions. HXQ uses a total return swap contract to replicate the performance of the Index and there is a fee for the swap contract but no foreign withholding tax.
Since inception HXQ index is 20.06% vs ETF NAV of 19.33% for a difference of 0.76%, slightly lower than BMO’s 0.79%. I’ve assumed that BMO and Horizons index is the same total return index.

Looking at the performance on StockCharts, at times HXQ was actually better than QQQ! See https://stockcharts.com/freecharts/perf.php?QQQ,ZQQ.TO,XQQ.TO,HXQ.TO# change the number of days from 200 to the max days. Not sure what’s going on with HXQ, maybe a difference between the NAV and the actually price of the ETF being traded?
 

·
Registered
Joined
·
13 Posts
Discussion Starter #7
The two ETFs you posted are hedged versions of QQQ that trade in Canada. Hedging introduces an additional performance drag due to various inefficiencies of the derivative process, and I think that's what you're seeing. The drag is significant, about 2% per year here!

Instead, if you use ZNQ (unhedged) the performance should be identical to holding QQQ. It's a relatively new ETF so it's a bit hard to tell, but looking at 6 month performance, ZNQ is up 6.39%. In the same period, the Canadian dollar has not changed at all, and QQQ itself is up 6.38% so it seems to be tracking about perfectly. Beware though, it's a very new ETF and has low daily volume; shouldn't impact much, but use limit orders.

ZNQ should be equivalent to just buying QQQ except it trades in CAD. Yes, you will be exposed to USD currency risk, but that's not a bad thing. It could go in your favour, or against, but is a normal part of foreign investing. And you can see the "cost" of trying to hedge it using those other funds like ZQQ... they're doing about 1% - 2% per year worse than QQQ which is a huge underperformance. It's not worth the cost of hedging.

This cost of hedging has shown up before, for example in XSP versus SPY. Yes, the hedged ETFs remove the USD currency exposure, but do so while killing a huge amount of performance. See https://www.canadianmoneyforum.com/showthread.php/121154-Hedge-or-non-hedged-ETF

I agree that having to transfer cash between CAD/USD for the purpose of trading the US based ETFs can be a bad idea. Unless you have a lot of USD sitting around, you're going to lose money in the currency transfers. So if you want to get as close as possible to "QQQ" while doing the trades in CAD, your best bet will be ZNQ

Similarly, for the S&P 500, the unhedged ZSP and XUS will get you as close as possible to "SPY" while trading in CAD.
Thanks for explaining. I've found another hedged ETF that's based on the QQQ - HXQ - It's also relatively new, I'm assuming its going to be the same as ZNQ?
 

·
Registered
Joined
·
13 Posts
Discussion Starter #8
There are at least three reasons why ZQQ will underperform QQQ:
1. Difference in the MER. ZQQ is 0.39% and QQQ is 0.20% for a difference of 0.19%.
2. Foreign withholding tax of 15% on distributions. QQQ has a distribution of 0.781%, so 15% withholding tax would be around 0.117% (although some of that could be return of capital), so call it 0.11%.
3. The cost to hedge USD to CAD. BMO reports an annualized performance since inception of 15.79% NAV versus 16.58% of the index for a difference of 0.79%. Less 0.19% (MER) and 0.11% (withholding tax) would be an average of 0.49% cost to hedge since inception (assuming that there are no other factors).

Take a look at Horizon’s ETF HXQ, which has a slightly better performance than ZQQ, but has a smaller AUM. This ETF doesn't have any distributions. HXQ uses a total return swap contract to replicate the performance of the Index and there is a fee for the swap contract but no foreign withholding tax.
Since inception HXQ index is 20.06% vs ETF NAV of 19.33% for a difference of 0.76%, slightly lower than BMO’s 0.79%. I’ve assumed that BMO and Horizons index is the same total return index.

Looking at the performance on StockCharts, at times HXQ was actually better than QQQ! See https://stockcharts.com/freecharts/perf.php?QQQ,ZQQ.TO,XQQ.TO,HXQ.TO# change the number of days from 200 to the max days. Not sure what’s going on with HXQ, maybe a difference between the NAV and the actually price of the ETF being traded?
Thanks for explaining! HXQ (and ZNQ) would be a better bet than ZQQ!
 

·
Registered
Joined
·
1 Posts
Anyone know why QQQ (Nasdaq-100 US ETF) outperforms its Canadian equivalents ZQQ and XQQ? - In the last 5 years QQQ has increased by 94.92% while ZQQ and XQQ both increased by only 87.36%

Whatever the reasons, is it a better deal to invest in QQQ and pay the currency conversion fee every time and get a higher return or is it better to invest in the ZQQ or XQQ and not pay the fees but get lower returns?
you do not need pay the currency conversion fee if you buy DLR ETF then transfer to DLR.U ETF, then you can invest America stock, but except RESP.
 

·
Registered
Joined
·
16 Posts
Sorry for resurrecting an old discussion. I just joined and I also want some opinions about HXQ.

I have been a long time holder of QQQ and frankly, I get a little frustrated converting CAD to USD and keeping track of the exact exchange rate after the entire purchasing transaction. Pin pointing the exact break even point can be a real chore.

So that's why I'm looking at HXQ now. No more currency conversions. The long term performance, since inception is better than QQQ, ZQQ and XQQ (all already discussed earlier in this thread).

However, I'm concerned about the low daily trading volumes. I'm afraid that over time when I have built-up a significant volume of HXQ, when it comes time to sell a portion at a price limit or a certain qty, it might not get fulfilled.

This can be a real concern for thinly traded stocks. Is this a concern for index ETFs as well?

Thanks in advance.
 

·
Registered
Joined
·
62 Posts
Sorry for resurrecting an old discussion. I just joined and I also want some opinions about HXQ.

I have been a long time holder of QQQ and frankly, I get a little frustrated converting CAD to USD and keeping track of the exact exchange rate after the entire purchasing transaction. Pin pointing the exact break even point can be a real chore.

So that's why I'm looking at HXQ now. No more currency conversions. The long term performance, since inception is better than QQQ, ZQQ and XQQ (all already discussed earlier in this thread).

However, I'm concerned about the low daily trading volumes. I'm afraid that over time when I have built-up a significant volume of HXQ, when it comes time to sell a portion at a price limit or a certain qty, it might not get fulfilled.

This can be a real concern for thinly traded stocks. Is this a concern for index ETFs as well?

Thanks in advance.
You might want to consider ZNQ as well. I believe it trades in unhedged Canadian.....
 

·
Registered
Joined
·
16 Posts
I just looked it up. ZNQ is only a year old, has a higher MER than HXQ and also has a lower daily volume than HXQ. I'm sticking with HXQ.

Another reason I like HXQ is that dividends the fund collects is reinvested within the fund via some sort of complicated swap with a participating Canadian bank. So HXQ grows with compounded dividends that you don't see or worry about in your taxable account.

Thanks.
 

·
Registered
Joined
·
18,250 Posts
I just looked it up. ZNQ is only a year old, has a higher MER than HXQ and also has a lower daily volume than HXQ. I'm sticking with HXQ.

Another reason I like HXQ is that dividends the fund collects is reinvested within the fund via some sort of complicated swap with a participating Canadian bank. So HXQ grows with compounded dividends that you don't see or worry about in your taxable account.

Thanks.
Just FYI, there are about nil dividends on the NASDAQ 100 so this makes just about no difference. But I do understand that some people prefer the total return, swap-based structure.
 

·
Registered
Joined
·
16 Posts
Just FYI, there are about nil dividends on the NASDAQ 100 so this makes just about no difference. But I do understand that some people prefer the total return, swap-based structure.
If we're hunting for high yield investments, there are lots of other good stocks.

However, this thread is about Nasdaq index ETFs.
Consider that a 0.4% yield is reinvested instead of paid out, the compounding can be significant in the long term.
 
1 - 16 of 16 Posts
Top