Investing in the S&P 500 is one of the most popular strategies for gaining exposure to U.S. large-cap stocks. The S&P 500 is widely regarded as a benchmark for the U.S. economy, and its performance is closely watched by investors around the world. For Canadian investors, Exchange-Traded Funds (ETFs) that track the S&P 500 offer an accessible and efficient way to diversify portfolios with U.S. stocks while trading on Canadian markets. But with multiple S&P 500 ETFs available to Canadian investors, selecting the best one requires some consideration.
In this article, we’ll discuss what makes the S&P 500 such a popular index, examine some of the leading Canadian S&P 500 ETFs, and analyze their differences. By understanding the options available, Canadian investors can make an informed choice based on their individual needs, preferences, and investment strategies.
Why Invest in the S&P 500?
The S&P 500 index represents the 500 largest publicly traded companies in the United States by market capitalization. It includes some of the most well-known companies globally, such as Apple, Microsoft, Amazon, and Tesla.
Benefits of S&P 500 Exposure
Investing in the S&P 500 allows for instant diversification across multiple sectors, including technology, finance, healthcare, consumer goods, and more. The companies within the index have demonstrated significant growth and resilience over time, making it a sought-after choice for those seeking steady, long-term growth.
Additionally, the S&P 500 has consistently provided solid returns over decades. While there are ups and downs, long-term investors have historically been rewarded with significant growth when investing in the index.
Canadian S&P 500 ETFs: Key Factors to Consider
Canadian investors have several options for ETFs that track the S&P 500 index. Here are some factors to consider:
Management Fees: ETF fees, also known as the Management Expense Ratio (MER), impact your returns. Lower fees are generally better, as they allow more of your investment to grow.
Currency Exposure: Some ETFs offer currency-hedged versions, which can help protect your returns from fluctuations in the Canadian dollar relative to the U.S. dollar. Unhedged ETFs, however, may perform better when the U.S. dollar strengthens.
Dividend Yields: Many S&P 500 companies pay dividends, and some ETFs automatically reinvest these dividends while others distribute them as cash.
Liquidity and Trading Volume: Higher liquidity means smaller bid-ask spreads, making it easier to buy and sell without impacting the ETF’s market price.
Top Canadian S&P 500 ETFs
Let’s look at some of the most popular S&P 500 ETFs available to Canadian investors. Each has its unique features, so understanding their differences can help in selecting the best fit.
1. Vanguard S&P 500 Index ETF (VFV)
Vanguard’s VFV is one of the most popular S&P 500 ETFs in Canada. It tracks the S&P 500 index and is unhedged, meaning it is exposed to currency fluctuations between the U.S. dollar and the Canadian dollar.
Key Features of VFV
Management Fees: VFV has a low management expense ratio of around 0.08%, making it one of the cheapest options.
Currency Exposure: VFV is unhedged, which means returns will be affected by U.S.-Canadian dollar exchange rates.
Performance: VFV closely matches the performance of the U.S. S&P 500, providing exposure to U.S. equities without requiring a U.S.-based account.
2. iShares Core S&P 500 Index ETF (XSP)
The iShares XSP is another popular Canadian S&P 500 ETF. Unlike VFV, XSP is currency-hedged, which can provide some stability if the Canadian dollar fluctuates.
Key Features of XSP
Management Fees: XSP has a management expense ratio of around 0.10%, slightly higher than VFV but still competitive.
Currency Hedging: XSP is currency-hedged, meaning it is less impacted by exchange rate fluctuations.
Dividend Reinvestment: XSP reinvests dividends, which can be advantageous for long-term growth.
3. BMO S&P 500 Index ETF (ZSP)
The BMO ZSP is also a top choice for Canadian investors interested in S&P 500 exposure. It is an unhedged ETF and, like VFV, is affected by currency changes.
Key Features of ZSP
Management Fees: ZSP has an expense ratio of approximately 0.09%, making it highly competitive.
Currency Exposure: ZSP is unhedged, so its performance depends on both the S&P 500 and the CAD/USD exchange rate.
Liquidity: ZSP is one of the most actively traded Canadian ETFs, which means it typically has good liquidity.
4. Horizons S&P 500 Index ETF (HXS)
The Horizons HXS is a unique ETF as it uses a total return swap structure. This structure allows the ETF to generate returns without actually holding the underlying stocks in the index, which can have tax advantages for Canadian investors.
Key Features of HXS
Management Fees: HXS has a slightly higher fee of around 0.10%.
Tax Efficiency: HXS does not pay dividends directly but instead reinvests them, which can reduce the taxable amount for Canadian investors.
Currency Exposure: HXS is unhedged, and returns may be affected by currency fluctuations.
Comparison of Canadian S&P 500 ETFs
When comparing these ETFs, it’s essential to consider personal investment goals, risk tolerance, and tax implications.
Cost Efficiency
If low fees are your top priority, VFV and ZSP are ideal choices. Both offer low management fees, which help maximize returns over the long term. The slightly higher fee of XSP may be worth it for those who prefer the stability of currency hedging.
Currency Hedging Considerations
For investors worried about currency risk, XSP’s hedged structure is attractive. However, if you believe the U.S. dollar will appreciate, an unhedged option like VFV or ZSP could offer higher returns.
Tax Advantages of Horizons HXS
For Canadian investors in non-registered accounts, HXS’s structure can provide tax advantages by avoiding direct dividend distributions. This feature is valuable for high-income investors who want to reduce their tax burden.
Factors to Consider When Choosing an ETF
Each investor has unique priorities, so here are a few considerations to keep in mind when selecting an S&P 500 ETF:
Long-Term Investment Strategy: If you’re investing for the long term, the difference in fees and currency risk may have a significant impact on your returns.
Tax Implications: Tax considerations are essential, especially in non-registered accounts. If minimizing taxable income is a priority, HXS might be a suitable choice.
Currency Outlook: If you believe the Canadian dollar will depreciate against the U.S. dollar, an unhedged ETF may be better. Conversely, if you’re concerned about currency volatility, consider a hedged option.
Investment Goals and Risk Tolerance: Those comfortable with exchange rate risk and looking for growth might favor an unhedged ETF. Those seeking stability might prefer a hedged option.
Conclusion
Choosing the best S&P 500 ETF as a Canadian investor depends on your investment goals, preferences, and risk tolerance.
- VFV is a cost-effective choice for those who don’t mind currency fluctuations.
- XSP is ideal for investors who prefer the stability of currency hedging.
- ZSP offers low fees and high liquidity, making it another strong option.
- HXS may appeal to tax-conscious investors due to its unique structure.
Each of these ETFs provides exposure to the same S&P 500 index but with slight variations in structure, fees, and currency considerations. Selecting the best one ultimately depends on balancing these factors with your investment objectives.
Related topics:
How to Invest in Currency ETFs
Why Choose Mutual Funds Over ETFs?
