I consider myself a true Canadian patriot, so I prefer to invest in Canadian-listed exchange-traded funds, or ETFs, as much as possible. Today, I’m focusing on homegrown alternatives to SPDR S&P 500 ETF (NYSEMKT: SPY), the famed exchange-traded fund (ETF) that tracks the S&P 500.
This powerful index captures 500 of the largest U.S. companies, making it a tempting choice for Canadian investors seeking to diversify their portfolios with American muscle. But before you make the leap across the border, there’s something you should know.
For Canadians, there’s an alternative path that keeps your investment dollars on Canadian soil, and it comes with some attractive benefits. What if I told you that you could get the same broad market exposure as the SPY but without the costly step of converting your loonies to U.S. dollars? Meet Canadian-listed S&P 500 ETFs.
Investing in these ETFs allows you to bypass currency conversion costs, which can silently erode your returns over time. As these ETFs are listed in Canadian dollars, you don’t have to worry about currency fluctuations when buying or selling the ETF.
This advantage, coupled with the same diverse market exposure you get with SPY, can make Canadian-listed S&P 500 ETFs a powerful weapon in your investment arsenal. Here’s a look at my top two picks.
Option #1: Currency unhedged
A very straightforward pick here is iShares Core S&P 500 Index ETF (TSX: XUS). This ETF has a simple goal: track the returns of the S&P 500 index, net of fees. Speaking of fees, it is very cheap, coming in at a management expense ratio (MER) of just 0.10% compared to SPY at 0.0945%.
One thing to note though: XUS is not currency hedged. Because the stocks in the S&P 500 trade in U.S. dollars, but XUS trades in Canadian dollars, fluctuations in exchange rates can add volatility, which can either be good or bad, depending on the direction.
Generally speaking, if the U.S. dollar appreciates, XUS will gain additional value. However, if the Canadian dollar strengthens, XUS will lose additional value. Over long periods of time, this tends to even out, but be aware before investing in XUS.
Option #2: Currency hedged
If you don’t like the idea of foreign exchange rate fluctuations affecting your investment, consider the currency-hedged version of XUS instead. The ETF to pick here is iShares Core S&P 500 Index ETF (CAD-Hedged) (TSX: XSP), which holds the same stocks as XUS but mitigates currency risk.
By using derivatives, XSP is able to mostly cancel out the effects of foreign exchange rate fluctuations between the Canadian and U.S. dollar. This means its returns will track closer to that of SPY, but with some drag due to the cost of currency hedging.
XSP is generally better suited for investors with a shorter time horizon or risk tolerance and who are not willing to accept the extra volatility of currency fluctuations. It costs the exact same 0.10% MER as XUS, but, again, the use of derivatives and currency hedging can cause a slight drag on returns.
