Many Canadians dream of the opportunity to partake in the world’s largest economy, the United States. For those who share this aspiration, the S&P 500, an index representing 500 of the largest U.S. companies, is an ideal gateway when it comes to an investment strategy.
While we cherish our Canadian roots and the opportunities available on home soil, there’s no denying that the S&P 500 offers an enticing prospect for investors seeking robust, long-term growth.
The index boasts an impressive lineup of corporations that are leaders not just on the American stage, but globally, and has historically been very hard to beat, whether by actively managed funds or stock-pickers.
And the best part? You don’t have to move across the border to take part in this American dream. Whether you’re managing a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP), I’ve got you covered.
Today, I’ll provide a Canadian exchange-traded fund, or ETF, pick for both these accounts, each serving as a viable vehicle to harness the growth potential of the S&P 500.
S&P 500: RRSP
The RRSP is a cornerstone of retirement planning for many Canadians. It offers the opportunity to save for your golden years while reducing your taxable income today. But did you know that it can also be a vehicle for tapping into the wealth potential of the S&P 500?
If you hold an S&P 500 ETF that’s listed in the U.S. within your RRSP, you can sidestep the 15% foreign withholding tax on U.S. dividends. This is a fantastic advantage afforded by the tax treaty between Canada and the U.S., which recognizes RRSPs as retirement accounts and, therefore, exempts them from this tax.
This foreign withholding tax exemption can have a significant impact on your investment returns over time. Consider that many S&P 500 companies pay dividends, and an ETF tracking the S&P 500 usually distributes these dividends to its holders.
If 15% of these dividends were regularly skimmed off as tax, it could amount to a considerable sum over the years. However, with your U.S.-listed S&P 500 ETF nestled within your RRSP, those potential tax losses transform into additional earnings.
My ideal pick here is the Vanguard S&P 500 ETF (NYSEMKT: VOO). This U.S.-listed ETF charges an ultra-low expense ratio of just 0.03%. However, keep in mind that you do need to convert Canadian to U.S. dollars to buy it. My suggestion is a brokerage with low currency conversion costs, like Interactive Brokers.
S&P 500: TFSA
The TFSA has been a game-changer for Canadian investors, providing a flexible vehicle for earning investment income and capital gains completely tax free. But how can this powerful tool be utilized to tap into the wealth potential of the S&P 500?
One important point to remember is that, unlike the RRSP, the TFSA doesn’t benefit from an exemption from the 15% foreign withholding tax on U.S. dividends. This tax applies regardless of whether you hold a U.S.- or Canadian-listed S&P 500 ETF within your TFSA.
Given this, you might wonder: why not opt for a Canadian-listed S&P 500 ETF for your TFSA? And you’d be right on the money. Choosing a Canadian-listed ETF that tracks the S&P 500 for your TFSA offers a compelling advantage: you save on currency conversion costs.
Since these ETFs are listed in Canadian dollars, you won’t need to convert your hard-earned loonies into U.S. dollars when you invest, nor when you decide to sell your holdings. This can result in substantial savings, especially for long-term investors.
My pick here is the Canadian version of VOO, called Vanguard S&P 500 Index ETF (TSX: VFV). All VFV does is invest in VOO as its underlying holding. However, it trades in Canadian dollars, so you don’t need to convert currency. It currently charges a 0.09% expense ratio.
