Like many things in life, the market is full of ups and downs. Fortunately, it has historically produced more ups than downs. Those who were able to weather the volatility and stay the course have been rewarded with healthy returns, as the overall global stock market generally trends upwards over the long term.
For example, Dynamic Funds found that between 1957 and 2021, there were 10 bull markets and bear markets when it came to Canadian stocks, with bull markets lasting longer at an average of 67 months versus bear markets at 11 months. Overall, the market does eventually go up.
While 2022 was certainly a bear market, it doesn’t mean that it will always be the case. Investing fearfully and holding cash isn’t a good way to build wealth long term. If you want to be lazy and not worry about picking stocks, consider buying an index exchange-traded fund, or ETF, instead for diversification.
Vanguard S&P 500 Index ETF
The S&P 500 is a stock market index that employs a market capitalization-weighted approach to track the performance of the 500 large-cap U.S. stocks. This index covers various sectors such as technology, healthcare, finance, communications, consumer staples, industrial, and energy.
To track the S&P 500 index, consider investing in ETFs like Vanguard S&P 500 Index ETF (TSX: VFV). This low-cost ETF has a management expense ratio (MER) of only 0.09%, boasts over $7.1 billion in assets under management (AUM), and has a high daily trading volume.
As a Canadian-based U.S. ETF, VFV is not hedged against currency fluctuations, which means its value can change depending on the CAD-USD exchange rate. Over time, these fluctuations tend to balance out, so they should not be a major concern for long-term investors.
iShares S&P/TSX 60 Index ETF
For Canadian stocks, the index to pick is the S&P/TSX 60, which, as its name suggests, tracks 60 of the largest blue-chip stocks listed on the TSX. In comparison to the S&P 500, the S&P/TSX 60 has a greater emphasis on the financial and energy sectors, which is typical for the Canadian market.
To follow the S&P/TSX 60 index, consider investing in iShares S&P/TSX 60 Index ETF (TSX: XIU). As the oldest Canadian ETF, XIU has over $11 billion in AUM and offers very high liquidity. Although its MER of 0.18% is higher than that of VFV, it is still relatively low cost compared to most mutual funds.
XIU pays an attractive dividend due to the presence of numerous Canadian dividend stocks in sectors such as energy, banking, telecommunications, and utilities. The current 12-month trailing yield is 3.1%, and it’s paid on a quarterly basis. Reinvesting these dividends can significantly enhance your investment returns.
