Many investors believe that beating the market is what investing is all about, but it’s the wrong perspective. For most long-term investors, it’s quite easy to build wealth over time by simply following and matching the market.
There are several ways to do it. You can build a diversified portfolio of individual assets made up of most of the heavyweights of the market, and your portfolio’s progress will mimic the market’s, to an extent.
However, the simplest way to match the market’s performance is by investing in the right broad market ETFs. You can achieve some diversification within this domain by investing in two markets that most Canadian investors understand to a certain degree — i.e., Canadian and American.
A Canadian market ETF
iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC) has been around since 2001, so you have over two decades of performance to gauge its potential. And even though the stock has 239 holdings, it gives you exposure to the entire TSX (not the other stock markets). The top 10 holdings include the four-largest banks, three energy giants, railway leaders, and Brookfield Asset Management.
Since it offers a relatively accurate representation of the TSX, the largest sector making up the ETF is financials followed by energy.
One of the most attractive features of this ETF is the low, almost negligible MER of 0.06%, which makes it an ideal long-term holding. It also offers quarterly dividends, and the current distribution yield is 2.66%.
However, for most investors, the decision to buy this ETF would depend upon its performance related to growth. Even though the Canadian market is relatively slow and more conservative compared to the American one, if you had invested in the ETF at its inception, you would have grown your capital four-fold by now. It offered roughly 2.5-fold growth in the last decade alone.
A U.S. market ETF
Most U.S. market ETFs allow you to mimic the two major markets: NYSE and NASDAQ. But the US Total Market Index ETF (TSX: VUN) from Vanguard will enable you to capture the bulk of the total U.S. market. It follows the performance of a collective basket of roughly 4,112 stocks. Since the U.S. has a tech-heavy market, over one-fourth of the total weight of the ETF is made up of tech companies.
The ETF falls short of the Canadian market ETF in two areas: distribution yield and MER. The MER is 0.16%, and the distribution yield is less than half at $0.16. However, it’s quite reasonably reconciled with the performance of the ETF. If you had invested $10,000 in the ETF at the time of inception, less than a decade ago (Aug. 2013), you would have grown your capital to over $33,000 right now.
At this pace, it would grow your capital by roughly 6.6-fold in two decades, which far outstrips the Canadian market ETF.
Foolish takeaway
It’s important to understand that even though broad market ETFs like these two suffer during stock market crashes. However, the dips are rarely as harsh as the dips in most individual stocks. The recovery might be relatively swifter as well. And even these crashes don’t undermine the long-term return potential of the ETFs by a significant margin.
