Today we’re shifting our gaze to the American market, specifically, the well-known and widely-traded SPDR S&P 500 ETF (NYSEMKT: SPY). Debuting in January 1993, this exchange-traded fund, or ETF is the largest in the world in terms of assets under management (AUM), and has a high daily trading volume.
Yet, as Canadian investors, should we be reaching across the border for this popular investment, or might there be benefits to keeping things a bit closer to home?
When investing in foreign markets, one factor that often slips under the radar is the impact of currency conversion. While it’s thrilling to buy a piece of the world’s largest market via SPY, the added cost of converting Canadian dollars to U.S. dollars can quietly eat into your returns.
What if if I told you there’s a way for Canadian investors to tap into the growth of the S&P 500 without the need for costly currency conversion?
Today, I’ll be showing you how Canadian-listed S&P 500 ETFs offer an exciting alternative that can result in substantial savings. Not only do these funds offer you exposure to the same U.S. market, but they also shield you from the unnecessary costs of currency conversion. Here are my top two picks.
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The BMO option
One of the most popular Canadian-listed S&P 500 ETFs is the BMO S&P 500 Index ETF (TSX: ZSP). With around $9.6 billion in AUM, ZSP is much smaller than SPY, but still sizable when it comes to the Canadian ETF market. However, it trades in Canadian dollars, so there’s no need for currency conversion.
In terms of fees, ZSP is highly cost-effective. Right now, the ETF sports a management expense ratio (MER) of 0.09%. For a $10,000 investment, this would cost you around $9 in annual fees. This is competitive with SPY’s 0.0945% expense ratio.
One thing to watch out for: ZSP is not currency hedged. This means that fluctuations in the exchange rate between the Canadian and U.S. dollars can either help or hurt it. In general, ZSP will gain more if the U.S. dollar appreciates, and lose more if the Canadian dollar appreciates.
The Horizons option
For investors looking for a more tax-efficient pick to hold outside of a TFSA or RRSP, consider Horizons S&P 500 Index ETF (TSX: HXS). This ETF uses derivatives to mimic the performance of the S&P 500, as opposed to actually holding all of its 500 stocks.
The result is a very unique S&P 500 ETF that doesn’t pay dividends. Rather, the dividends are automatically reflected in the total return, or share price of the ETF. The lack of dividends makes HXS a very tax-efficient option to hold in a taxable brokerage account.
In terms of fees, HXS charges a 0.10% MER, along with a “swap fee” capped at 0.30%. This can seem pricey, but there is no longer a 15% foreign withholding tax on dividends because they’re not being paid anymore. This actually makes HXS very competitive with ZSP in terms of overall cost of ownership.
