Cross the Border to Prosperity: Canadian Investors Can Find Opportunities in the U.S. Market

These two ETFs provide affordable exposure to thousands of U.S. stocks.

Tony Dong, MSc, CETF®

Tony turned a series of 2017 marijuana stock losses into a freelance career advocating for ETF investing. He currently holds a Master’s in Risk Management from Columbia University and is a Certified ETF Advisor (CETF®). Tony is the founder of ETF Portfolio Blueprint (etfportfolioblueprint.com) and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE. His analysis has also been featured in publications like Kiplinger, 24/7 Wall St., U.S. News & World Report, TheStreet, and Benzinga.

Published June 22, 2023 1:00 pm EDT

How much of your investment portfolio is held in Canadian stocks? If the answer is “above 30%”, it might be a bit too much.

While a Vanguard study found that a 20%–30% “home country bias” in Canadian stocks is good for improving tax efficiency, reducing volatility, and mitigating currency risk, too much can be detrimental.

This is all the more important when you realize that Canadian stocks only account for around 3% of the world by market-cap weight. The solution? Consider a healthy serving of U.S. stocks, which sit at around 60%.

I’m no stockpicker, so I can’t recommend which U.S. stocks I think are a good buy. What I can do is bring your attention to two exchange-traded funds (ETFs) that provide diversified exposure to thousands of U.S. stocks at a low fee.

The Vanguard option

Vanguard U.S. Total Market Index ETF (TSX: VUN) currently provides exposure to 3,895 large-, mid-, and small-cap U.S. stocks across all 11 market sectors and encompassing both value and growth stocks. It achieves this by tracking the CRSP US Total Market Index.

This index is far more broad than the S&P 500, which only tracks 500 large- and mid-cap stocks selected by a committee. In contrast, VUN’s index is designed to track the entire investable U.S. stock market, which includes small caps. The ETF charges a 0.16% expense ratio.

The iShares option

A viable alternative to VUN is iShares Core S&P U.S. Total Market Index ETF (TSX: XUU). This ETF may track the different S&P Total Market Index, but the underlying holdings are nearly identical. Historically, XUU has performed very similar to VUN, which makes them viable tax-loss harvesting partners.

However, I personally like XUU better than VUN due to one simple factor: fees. Currently, XUU sports an expense ratio of 0.08%, or half that of VUN. For a $10,000 investment, that works out to just $8 in annual fees. Keeping fees low helps better compound long-term net returns.

The Foolish takeaway

Regardless of your pick, either VUN or XUU could be a great ETF for passively tracking the broad U.S. stock market. My preferred strategy is to use one of these ETFs as the core of my portfolio, while supplementing them with a few select Canadian dividend stock picks (and The Fool has some great suggestions below!)