The S&P 500 Index houses the top 500 stocks by market capitalization. If you buy the SPDR S&P 500 ETF (NYSEMKT:SPY), it pretty much comprises more than 90% of the market. Now, this exchange-traded fund (ETF) is a good start to the stock market as it gives you exposure to 500 stocks. The index has surged more than 50% in the last five years. There are many other market ETFs like the Nasdaq ETF and TSX Composite ETF.
Why Canadian investors should look beyond SPY stock
Now, you may think that market ETFs take care of your portfolio diversification and give you equity-linked returns. However, a market ETF can only give capital appreciation from market returns. However, some specific sectors and individual stocks can help you beat the market and even cater to other financial needs, like passive income.
A well-diversified portfolio invests in contrarian stocks and asset classes that can mitigate the risk of the downside and accelerate upside potential. Moreover, every stock market has its strengths and weaknesses. Your Tax-Free Savings Account (TFSA) allows you to invest in major stock markets. You can make the most of it by investing in at least two major markets.
For instance, the SPY market has significant exposure (more than 50%) to information technology, healthcare, and financial sectors. The TSX market has significant exposure to the energy and banking sectors. The tech stock selloff pulled the SPY ETF down 25% and the TSX Composite Index down 15%.
Expand your horizons for better returns
When you are new to investments, it is better to start with market ETFs. But as you learn about the market, add some growth and dividend stocks and some gold and real estate investment trust stocks to hedge against inflation. You can consider the following three stocks beyond ETFs.
Bombardier stock
Consider investing in business jet maker Bombardier (TSX:BBD.B) for capital appreciation. This stock will take a hit in a recession, but its fundamentals and turnaround story could help it make a strong comeback. The business jet maker still has 87 aircraft deliveries in the second half compared to 51 in the first. Unlike other companies that lowered their 2023 outlook and suspended long-term financial targets, Bombardier has maintained its 2023 outlook.
It is also not worried about high interest rates, as it has paid its debt maturities till 2024 and is closer to repaying its 2025 maturities. While many companies are seeing a revenue dip, Bombardier actually increased its 2023 revenue outlook. Despite all this fundamental strength, the stock fell 19% in August, as the TSX Composite Index fell 4.5%. This stock can help you accelerate your upside alongside the market. Hence, buy the stock when it falls.
Enbridge stock
You can diversify your portfolio with a Dividend Aristocrat like Enbridge (TSX:ENB). The company has stable cash flows from the toll money it collects for transmitting oil and gas through its pipelines. Pipeline stocks are less volatile in a macro environment, giving stability to your portfolio. Also, Enbridge is known for its dividend growth. The company has slowed its dividend growth to 3% from 9% before the pandemic, as it has accelerated its capital spending on building gas pipelines.
Now is a good time to buy the stock as it trades below $50. You can lock in more than a 7% dividend yield that will grow annually. Enbridge can give you passive income in all market conditions. You can use it for daily expenses or reinvest it in other stocks.
Barrick Gold
The third missing piece in your portfolio is a stock that can reduce your downside. Gold is an evergreen safe-haven investment that tends to do well when the economy weakens and paper-backed currency falls. The paper currency is as strong as the economy. But gold is accepted across the globe and has the same value. Hence, when a country’s economy falls, the gold price rises. You can access the gold price fluctuation by investing in one of the largest gold miners, Barrick Gold.
