Picture this: you’re at a hockey game, and your team only has defencemen — no forwards and no goalies. They might do okay, but they’re definitely missing some key players, right? It’s the same with investing.
Let’s talk numbers for a moment: Canada’s stock market only makes up only about 3% of the world’s market by weight. Our southern neighbour, the United States, on the other hand, holds court with around a whopping 60%.
The takeaway here? Diversification is key. Just like your hockey team needs a mix of positions to succeed, your investment portfolio needs a diverse mix of sectors to help you reach your financial goals.
And that’s where exchange traded funds (ETFs) come in. They’re kind of like your own personal team of forwards, defencemen, and goalies all working together to help you win the investment game.
With ETFs, you can dip your toes into the massive pool of U.S. stocks and gain exposure to sectors that are less represented on home ice, such as technology and healthcare. Here are two that I personally really like.
The S&P 500 Index
A great pick for investors looking for access to the 500 top-notch large- and mid-cap stocks selected by the S&P Committee is Vanguard S&P 500 Index ETF (TSX: VFV), a highly popular S&P 500 index ETF.
VFV holds U.S. stocks from all 11 stock market sectors and is currently concentrated in the technology sector. This is due to the ETF’s passive market-cap weighted index, which always holds a higher proportion of larger stocks.
The best thing about VFV in my opinion is its low cost. For a measly 0.09% expense ratio, or $9 annually on a $10,000 investment, you get exposure to 500 of the leading U.S. stocks on the market right now.
The Total U.S. Stock Market
A popular alternative to VFV is Vanguard U.S. Total Market Index ETF (TSX: VUN), which tracks the much broader CRSP US Total Market Index. This ETF goes beyond the 500 stocks in the S&P 500 to encompass a total of 3,895 holdings.
The main reason to pick VUN over VFV boils down to your view on mid- and small-cap U.S. stocks. As a total market ETF, VUN looks replicate the overall U.S. market as closely as possible, whereas VFV’s stocks are selected by a committee.
So far, VFV has been more popular than VUN, with greater assets under management. A big reason behind this is the higher fees charged by the latter, with VUN sporting an expense ratio of 0.16%.
