The SPDR S&P 500 ETF (NYSEMKT:SPY) is almost akin to a venerable elder in the exchange-traded fund (ETF) realm. Launched in 1993, SPY has paved the way for many ETFs that followed, offering investors a way to tap into the broad U.S. stock market.
Its continued popularity isn’t just rooted in its long-standing history. Investors flock to SPY due to its enviable liquidity, ensuring they can buy or sell with ease. Plus, with an ultra-low 0.09% expense ratio, it’s one of the most cost-effective avenues to gain exposure to the S&P 500’s wide spectrum of companies.
However, circling back to our main question — “Is SPY a buy in September 2023?” — it’s essentially probing whether now is the opportune moment to dive into the stock market. If you’re trying to pinpoint the ideal moment to jump in, let me save you some time: don’t even bother trying to time the market.
Timing the market is a game many have tried, but few, if any, consistently succeed. Predicting its next move is an endeavour fraught with pitfalls. So, instead of wracking your brain over the right moment to buy SPY, shift your focus. There are deeper, more pertinent questions you should be contemplating.
While SPY is an outstanding ETF, there are others lurking in the shadows that might better align with your objectives. Stay tuned, as we dive into the inquiries you should be tackling and explore some ETF alternatives that might just outshine SPY.
Reason #1: Currency conversion costs
Before diving headfirst into U.S.-listed ETFs, there’s a key question you must ask yourself: “Do I truly know how much my broker charges to convert my CAD to USD?”
This isn’t just a casual musing; it’s fundamental to your bottom line, especially when considering an investment in SPY, which trades in U.S. dollars.
Every time you buy or sell a U.S.-listed ETF, if you’re using Canadian dollars, a conversion takes place. And this isn’t a one-to-one, straightforward transaction. Currency conversion has its costs.
Even if your broker touts a “low fee” for forex transactions, there’s often a spread between the buying and selling price of currencies. This spread can vary, sometimes significantly, among different brokers.
Over time and across multiple transactions, these spreads can nibble away at your returns, especially if you’re frequently trading or making regular contributions.
For Canadian investors looking to avoid these pesky currency conversion costs, there’s good news. You can still gain exposure to the S&P 500 without the need to convert CAD to USD.
Vanguard S&P 500 Index ETF (TSX:VFV) offers a compelling alternative. It’s a Canadian-listed ETF that trades in CAD, allowing you to sidestep those conversion fees. Plus, with an expense ratio of 0.09% — mirroring that of SPY — it offers the same cost efficiency.
Reason #2: Currency risk
Pause for a moment and ponder this: What happens to my investment in SPY if, out of the blue, the CAD appreciates against the USD?
It’s not just a theoretical question. Currency fluctuations between the Canadian dollar and the U.S. dollar can impact the returns of your investment in SPY.
Here’s the scenario: imagine you’ve invested in SPY when the CAD was weak compared to the USD. Fast forward a bit, and now the CAD has gained strength.
When you decide to sell your SPY shares and convert your returns back to CAD, the gains might be significantly offset or even turned into losses due to the currency’s appreciation.
In simpler terms, even if SPY performs spectacularly in terms of its underlying assets, a strong CAD can erode those gains for Canadian investors when those returns are converted back to CAD.
If the thought of this currency risk makes you queasy, there’s a solution at hand: currency-hedged ETFs. Vanguard S&P 500 Index ETF (CAD-Hedged) (TSX:VSP) stands out as a prime example.
This ETF operates similarly to its counterpart, VFV, but with a twist. VSP uses financial instruments to hedge against the fluctuations between the CAD and USD.
This means that the ETF aims to neutralize the effects of currency variations, ensuring that your returns are predominantly driven by the performance of the underlying assets, not the whims of the forex market.
