As a true Canadian patriot, I love Bay Street and its roster of solid dividend stocks as much as any other investor, but it’s time we admitted something: the Canadian market is woefully underdiversified.
We may dominate in the financial and energy sectors as well as industrials but tend to come up short in two notable sectors: healthcare and technology. In this realm, our cousins down south on Wall Street have us soundly beat.
In terms of size, we lose as well. In terms of market capitalization, the Canadian market only accounts for 3% of the world. The U.S. market, however, sits comfortably at 60% after decades of outperformance.
Well, if you can’t beat them, join them, right? Thanks to the availability of exchange-traded funds, or ETFs, investing in U.S. stocks to diversify your Canadian-focused portfolio has never been easier. Here’s a look at my top two picks today.
The S&P 500 Index
A very popular and straightforward option for exposure to 500 of the largest and leading U.S. companies is the S&P 500 index. Historically, this index has been very difficult for most actively managed funds and stock pickers to beat. Hence, investing passively in it via an index ETF could be a great long-term strategy.
A transparent and affordable Canadian ETF pick to consider, here is iShares Core S&P 500 Index ETF (TSX: XUS). I really like this ETF thanks to its focus on keeping fees low. With an expense ratio of 0.10%, investors can expect to pay around $10 in annual fees on a $10,000 investment.
The S&P U.S. Total Market Index
The S&P 500 index is well known and highly regarded, but by no means is it a perfect investment. A common criticism is that it excludes many mid- and small-cap stocks. This is because the 500 holdings in the S&P 500 are selected by a committee to be representative of the U.S. market.
To actually track the total U.S. market of thousands of stocks, investors can buy iShares Core S&P U.S. Total Market Index ETF (TSX: XUU) as an alternative to XUS. This ETF holds all the stocks in XUS, plus thousands of other mid- and small-caps. Best of all, it charges an even lower expense ratio of 0.08%.
