Exchange-traded funds, or ETFs for short, are one of the best investment tools that modern investors have at their disposal. Many beginner investors simply try to learn how to buy stocks, and don't look at a more passive style of investing 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.
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.
While Canada has its fair share of ETFs, Canadian ETFs have one key downside. Their exposure is primarily overweight on 3 sectors due to the makeup of the index:
- Oil and Gas
The solution? Exposure to the S&P 500
Many Canadians likely have somewhat of a home country bias when it comes to their investments, meaning they have too much of their portfolios allocated to Canada. Our country simply doesn't have a large enough economy and 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 it inconvenient to swap their CAD for USD to buy US stocks or ETFs. So, many fund managers have developed Canadian traded S&P 500 ETFs, which allow for exposure south of the border without even exchanging currency.
What exactly is the S&P 500, and how does it get you exposure outside of Canada?
The S&P 500 is the Standard & Poor's 500 Index. This is a stock market index comprised of the 500 largest companies in the United States.
Now, this isn't a concrete definition. In fact, the index does contain a little over 500 companies, and it 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. In fact, it was pretty big news when Tesla was added back in 2020.
Because of its 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 as a benchmark index to compare their investment returns.
You'll see many of the top companies in the world inside of 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 does trade in USD, so you'd have to convert prior to buying.
Is there a similar index in Canada?
Because we are not nearly as large as the United States, it simply 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 is a Canadian ETF that tracks the 60 largest companies in Canada and is the oldest ETFs in existence, originating in 1990. The ticker for this index fund is XIU.
Does the S&P 500 pay a dividend?
The S&P 500 itself is simply an index that 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 important 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.
With all that said, let's get to some of the top S&P 500 ETFs in Canada today.
What are the best Canadian S&P 500 ETFs to buy?
- Vanguard S&P 500 Index ETF (VFV)
- Vanguard S&P 500 Index ETF CAD Hedged (VSP)
- iShares Core S&P 500 Index ETF (XUS)
- BMO S&P 500 Index ETF (ZSP)
- Horizons S&P 500 Index ETF (HXS & HXS.U)
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 when they look to invest in US assets. The fund has over $6.7B in assets under management and started trading in early 2013.
The fund has a relatively simple structure, holding Vanguard's underlying US S&P 500 ETF in VOO. Much like any other fund on this list, its top holdings contain the likes of big US tech 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 keep in mind while investing in VFV is that it is NOT tied to the Canadian dollar. This is an unhedged ETF, meaning that you are betting on a stronger US market and a stronger US dollar.
The fund is very cheap to own, costing investors only $0.90 per $1000 invested on an annual basis. Vanguard continually excels when it comes to offering the best products at the cheapest rates. VFV is no exception. The fund also pays out a 1.26% distribution.
In terms of total performance, this fund has outperformed the S&P 500 by a significant margin since its inception. This is primarily due to the unhedged nature of the fund. At the time of writing, the fund has total returns of 346% since 2013, while the S&P 500 sits at 235%.
Keep in mind, there is no guarantee that this performance continues carrying forward, as currency fluctuations tend to even out over the long term. But for those who want a currency hedged option instead, lets 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 the same as VFV in the fact it simply holds Vanguard's US S&P 500 ETF in VOO. Both of the funds started trading around the same time as well, early 2013. However, there is obviously 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, the way this ETF gets exposure to the S&P 500 is holding the underlying US-listed ETF VOO. This is exactly why when you look at VSP on something like Yahoo Finance, it has only a single holding.
Before I start sounding like a broken record in terms of holdings and allocations, 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 quite a bit smaller than VFV, with assets under management coming in at just over $2.53B. And in terms of fees, it's going to cost you the same to own this one on an annual basis, coming in at $0.90 per $1000 invested.
The fund pays a 1.35% distribution and in terms of performance, the currency hedging has really cost this one over the years. It current has returned of 208% over the last ten years, trailing the index by nearly 30% and VFV by over 130%..
$10,000 into VSP at its inception has you sitting with $30,130 at the time of writing. With the unhedged version VFV, you'd be sitting on returns of $44,000. So, this is ultimately something you need to consider.
iShares Core S&P 500 Index ETF (TSE:XUS)
The iShares S&P 500 Index ETF is much the same as VFV in the fact that it owns its US traded fund as the primary holding. In this case, it would be IVV.
Although we went over both versions of the Vanguard ETF, I'm not going to list both the hedged and unhedged versions of the iShares ETF. I more so wanted to do that above 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 $4.53B. 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 on an annual basis and it currently pays a distribution of around 1.18%.
This fund debuted in late-2013, and has put up 264% returns since. Because of its unhedged nature, this one has outperformed the S&P 500 by a wide margin as well, putting up nearly 3% greater returns on an annualized basis.
BMO S&P 500 Index ETF (TSE:ZSP)
You may be starting to see a trend here. The trend being we're simply mentioning most of the major ETF companies here in Canada. And, that's exactly right, most all of them have some sort of S&P 500 fund.
However, the BMO S&P 500 Index ETF does have a bit of a different twist on it in the fact it simply owns the underlying stocks over an underlying ETF.
In the grand scheme of things, this doesn't really mean much. Because this is a 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.
Much 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 XSP is hedged.
Again, the holdings will be relatively the same across all these funds, except the fact that BMO owns individual securities while the others own ETFs that hold the same securities.
ZSP has around $12B in assets under management, making it the largest and most liquid fund on this list by quite a wide margin. The fund also ends up squeaking out a little bit of added income as it yields 1.4% at the time of writing.
In terms of fees, considering most all of these funds are identical, many fees are identical as well. They will need to be or else investors will simply 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 in the fact it has both 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 $2.32B in assets under management and has competitive fees of $1 per $1000 invested. However, one key difference with HXS is the fact it doesn't pay a distribution at all, while many others on this list pay in the low 1% range.
Now, before you go avoiding this ETF simply because it doesn't pay a distribution, it's important to note that this fund has outperformed by nearly 2% on an annualized basis if we look back to early 2013. Now, if we included the distributions, performance equals out to be relatively the same.
However, there are particular tax advantages to a fund paying out no distribution in certain cases. For one, if you do not have any of the other funds tax sheltered, you would pay tax on the distribution in the year you had received it.
Because HXS does not pay a distribution, you could defer the taxes until sold for a capital gain. This is an interesting concept that a lot of investors would be wise to 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, really.
In terms of management fees, they vary by ten cents a year, a negligible amount really. Vanguard, Blackrock, BMO, and Horizons all are excellent fund companies, and you really can't go wrong with owning any of these S&P 500 ETFs here in Canada.
However, it's important 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 a 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 of a registered account like an RRSP. It's very important to figure out your personal tax situation before making investments.