While Canada has its fair share of ETFs, Canadian ETFs have one key downside. Their exposure is primarily overweight on three sectors due to the makeup of the index:
- Oil and Gas
The solution? Exposure to the S&P 500
Many Canadians likely have a home country bias regarding their investments, meaning they have too much of their portfolios allocated to Canada.
Our country doesn't have a large enough economy. It relies too much on fossil fuel and commodity production to be exclusively invested in.
But, because we spend and earn our money in Canadian dollars, many investors may find swapping their CAD for USD inconvenient to buy US stocks or ETFs.
So, many fund managers have developed Canadian-traded S&P 500 ETFs, allowing for exposure south of the border without exchanging currency. These ETFs trade on the Toronto Stock Exchange, which adds to their convenience for Canadian investors.
With all that said, let's get to some of Canada's top S&P 500 ETFs today.
What are the best Canadian S&P 500 ETFs to buy?
Vanguard S&P 500 Index ETF (TSE:VFV)
The Vanguard S&P 500 Index ETF (TSE:VFV) is one of the most popular ETFs for Canadians looking to invest in US assets. The fund has over $7.2B in assets under management and has an inception date of November 1st, 2012.
The fund has a relatively simple structure, holding Vanguard's underlying US S&P 500 ETF in VOO (see a comparison of these two funds here).
Much like any other fund on this list, its top holdings contain big US techs like Apple, Microsoft, and Google while also having exposure to some household names like Home Depot, Procter & Gamble, and Bank of America.
One key point to remember while investing in VFV is that it is NOT tied to the Canadian dollar. This is an unhedged ETF, meaning you are betting on a stronger US market and a stronger US dollar.
The fund is very cheap, costing investors only $0.90 per $1000 invested annually. Vanguard continually excels in offering the best products at the most affordable rates. VFV is no exception. The fund also pays out a 1.25% distribution.
In terms of total performance, it looks like it has outperformed by a wide margin, but this is primarily due to the unhedged nature of the fund. With an index fund, you're going to get similar returns to the index. Remember, currency fluctuations tend to even out over the long term.
But for those who want a currency-hedged option instead, let's go over another Vanguard product below.
Vanguard S&P 500 Index ETF (CAD-hedged) (TSE:VSP)
The Vanguard S&P 500 Index ETF (TSE:VSP) is essentially the same as VFV because it holds Vanguard's US S&P 500 ETF in VOO. Both funds started trading around the same time as well, in early 2013. However, there is one key difference.
Unlike the previous ETF VFV, this ETF is hedged to the Canadian dollar. Currently, this Vanguard ETF seeks to track the S&P 500 Index (CAD-hedged) (or any successor thereto).
As mentioned, this ETF gets exposure to the S&P 500 by holding the underlying US-listed ETF VOO. This is precisely why it has only a single holding when you look at VSP on something like Yahoo Finance.
Before I start sounding like a broken record regarding holdings, allocations, and diversification, VSP has much the same holdings as any other ETF on this list.
However, this ETF will also use derivative instruments to seek to hedge the US dollar exposure of the securities included in the S&P 500 Index back to the Canadian dollar.
This fund is smaller than VFV, with assets under management at just over $2.69B. And in terms of fees, it's going to cost you the same to own this one annually, coming in at $0.90 per $1000 invested.
The fund pays a 1.25% distribution, and in terms of performance, currency hedging has cost this one over the years. It has returned 198% over the last ten years, trailing the index by nearly 30% and VFV by triple digits.
$10,000 into VSP at its inception has you sitting with more than $35,000, at the time of writing. With the unhedged version VFV, you'd be sitting on just over $50,000.
As you can see, that Canadian Dollar hedge came at a steep price, but historical annual returns don't always predict the future. Perhaps the hedged version will outperform over the next decade.
iShares Core S&P 500 Index ETF (TSE:XUS)
The iShares Core S&P 500 Index ETF (TSE:XUS) is much the same as VFV because it owns its US-traded fund as the primary holding. In this case, it would be IVV.
Although we reviewed both versions of the Vanguard ETF, I will not list the hedged and unhedged versions of the iShares ETF. I wanted to point out the differences in returns for hedging. This ETF (XUS) is the unhedged way to get exposure to the S&P 500 via iShares. Its hedged version trades under the ticker XSP if you are interested.
XUS has assets under management of $4.6B. So, it's not as big as the Vanguard fund, but it is still one of the largest ETFs in the country. The management expense ratio for the fund will run you $1 per $1000 invested annually and currently pays a distribution of around 1.3%.
This fund debuted in late-2013 and has put up 343% returns since. Because of its unhedged nature, this one has outperformed the S&P 500 by a wide margin, putting up nearly 3% greater returns annually. As mentioned, this past performance is not guaranteed to continue.
BMO S&P 500 Index ETF (TSE:ZSP)
You may see a trend here. The trend being we're mentioning most of the major ETF companies here in Canada. And that's exactly right, most of them have some type of S&P 500 fund.
However, the BMO S&P 500 Index ETF (TSE:ZSP) has a bit of a different twist because it simply owns the underlying stocks over an underlying ETF.
In the grand scheme of things, this doesn't mean much. Because this is an ETF of US securities that trades in Canadian dollars, there are no tax advantages to holding a fund that contains US stocks or US ETFs. It doesn't change the unit value of this ETF at all.
Like the other S&P 500 ETFs on this list, BMO has an unhedged and hedged version of their S&P 500 ETF. ZSP is unhedged, while ZUE is hedged.
Again, the holdings will be relatively the same across all these funds, except that BMO owns individual securities. In contrast, the others own ETFs that hold the same securities.
ZSP has around $9.2B in assets under management, making it the largest and most liquid fund on this list by a pretty wide margin. The fund is also squeaking some added income as it yields 1.44% at writing.
In terms of fees, considering most of these funds are identical, many fees are similar as well. They will need to be, or investors will swap ETFs, often for no commission, on many major brokerages. So, BMO's ETF comes right in line with the others at $0.90 per $1000 invested on an annual basis.
Horizons S&P 500 Index ETF (TSE:HXS) & (TSE:HXS.U)
This is an outperformer on the ETF scale when it comes to Canadian S&P 500 ETFs.
The Horizons S&P 500 Index ETF is unique because it has a Canadian dollar version (TSE:HXS) and a US dollar version (TSE:HXS.U). Which one you choose will ultimately depend on where you see each currency heading into the future.
The performance of HXS.U directly corresponds to the performance, in US dollar terms, of the S&P 500 Index, net of expenses. The performance of the HXS will generally, but not directly, correspond to the performance, in Canadian dollar terms, of the S&P 500 Index, net of expenses.
The difference in the performance of the CAD units in Canadian dollar terms is solely a result of the differences in daily currency rates used by the ETF and the index provider to determine the net asset value and Index level, respectively, in Canadian dollar terms.
The fund has $2.1B in assets under management and has competitive fees of $1.10 per $1000 invested. However, one key difference with HXS is that it doesn't pay a distribution, while many others on this list pay in the low 1% range.
Now, before you avoid this ETF simply because it doesn't pay a distribution, it's important to note that this fund has outperformed by nearly 2% annually if we look back to early 2013. If we included the distributions, performance equals relatively the same.
However, there are particular tax advantages to a fund paying out no distribution in some instances. For one, if you do not have any other funds tax-sheltered, you would pay tax on the distribution in the year you received it.
Because HXS does not pay a distribution, you could defer the taxes until sold for a capital gain. This is an exciting concept that many investors should investigate and see if it suits their needs.
Overall, this list of the best S&P 500 ETFs in Canada is more of a brand battle than anything
Besides HXS, which does provide a unique proposition for those who don't care much about the small distribution coming from the other funds, the decision on which S&P 500 ETF in Canada comes down to brand.
In terms of management fees, they vary by ten cents a year per $1,000 invested, a negligible amount. Vanguard, Blackrock, BMO, and Horizons are all excellent fund companies, and you can't go wrong with owning any of these S&P 500 ETFs in Canada.
However, it's essential to understand and check out your brokerage commissions. Some of these ETFs may be free to purchase on popular Canadian brokerages like Questrade and Qtrade.
In terms of hedging vs unhedged, that's a story for another article. The past is not a guarantee of future results. However, on a historical basis, you would be much better off going with an unhedged version.
Also, an important note to understand. Because these trade in Canadian dollars but hold underlying US stocks or ETFs, the distributions could be subject to withholding tax even inside a registered account like an RRSP. It's crucial to figure out your personal tax situation before making investments.
What is an ETF?
Exchange-traded funds, or ETFs for short, are one of the modern investor's best investment tools. Many beginner investors try to learn how to buy stocks and don't look at a more passive investing style like ETFs.
An ETF is an investment fund that tracks a particular sector, index, commodity, or basket of stocks and can be traded on an index just like any other stock. Investors can buy ETFs on their own or through a financial advisor, although that option usually comes with higher fees, which ultimately hurts long-term returns.
The beauty of ETFs is that investors can build a diversified portfolio with low investment capital. It is perfect for investors with limited capital or new investors (young and old) who want to diversify their risks and maximize gains.
What is the S&P 500?
The S&P 500 is the Standard & Poor's 500 Index. This stock market index comprises the 500 largest companies in the United States.
Now, this isn't a concrete definition. The index contains over 500 companies and doesn't necessarily have to be the 500 largest. That is because there are strict indexing requirements that companies have to go through to get included. It was big news when Tesla was added back in 2020.
Because of the diversity of companies in the index, the performance of the S&P 500 is often referred to as the barometer of the US economy. Many US-based portfolios use the S&P benchmark index to compare their investment returns.
You'll see many of the world's top companies inside the S&P 500, such as Apple, Microsoft, Amazon, Alphabet (Google), Tesla, Berkshire Hathaway, Nvidia, Johnson & Johnson, Meta Platforms, Visa, and so much more.
The most prominent S&P 500 ETF would be SPY, which is the SPDR S&P 500 ETF Trust. However, this fund trades in USD, so you'd have to convert before buying.
Is there a similar index in Canada?
Because we are not nearly as large as the United States, it wouldn't make sense for us to have an index of our 500 largest companies here in Canada.
Alternatively, however, we do have the TSX 60. This Canadian ETF tracks the 60 largest companies in Canada and is the oldest ETF in existence, originating in 1990. The ticker for this index fund is XIU.
A more broad-based Canadian index is the TSX Composite Index, which tracks a more diverse index than the TSX 60. The number of holdings can differ based on how many stocks meet the index criteria, with approximately 220 different stocks making up the TSX Composite Index today.
Does the S&P 500 pay a dividend?
The S&P 500 index tracks the largest companies in the United States. However, when we look at some US S&P 500 ETFs and the Canadian S&P 500 ETFs below, there are distributions in the funds.
However, it is essential to note that these funds pay distributions, not dividends. And although this may seem like a trivial topic, it isn't. A distribution can be made up of many things, such as a dividend, capital gain, interest income, or return of capital.
This distinction is especially important when paying income taxes, as different types of income are taxed differently.
For investors who just want to reinvest their dividends, it's relatively easy to set an S&P 500 ETF to have automatic reinvestment of all dividends.