Investing in your own country is always a plus, as you know the stocks. But staying invested only in the TSX exposes you to country risk and limits your portfolio to a few sectors like energy, banking, and mining, which are Canada’s strengths. But if you want to invest in the automotive or semiconductors sectors, America has better stocks. The Tax-Free Savings Account (TFSA) allows you to invest in U.S. stocks without compromising your tax benefit.
Looking beyond SPY stock
The first investment option that comes to mind when considering investing in the U.S. is the S&P 500 Index, which comprises the top 500 stocks by market capitalization. It covers everything from Apple to Berkshire Hathaway to Costco. Information technology, financials, health care, and consumer discretionary sectors account for 65% of the index.
The SPDR S&P 500 ETF Trust (NYSEMKT:SPY) allows you to replicate the S&P 500 Index. From a diversification perspective, it might look like a good bet. While it mitigates risk from any sector or company, it also mitigates the gains.
The SPY ETF surged 73.9% in the last five years and 16.6% in 12 months, underperforming the semiconductor ETF and Nasdaq 100 Index. America’s strength is its tech sector, both hardware and software.
The Invesco QQQ Trust Series 1 (NASDAQ:QQQ), which tracks the Nasdaq 100 index, surged 142% in five years and 39% in 12 months, whereas the VanEck Semiconductor ETF (NASDAQ:SMH) surged 260% and 49%, respectively. While these tech ETFs outperformed the SPY in good times, the SPY outperformed in bad times.
During the tech stock sell-off from January 1 to October 7, 2022, SMH fell 44% and QQQ 34%, while SPY fell 23.6%. But refraining from investing in the tech ETFs for a cyclical dip is a huge opportunity cost. Instead, you can diversify your U.S. portfolio by buying all three ETFs. The right portfolio diversification is the one that maximizes returns and minimizes risks.
The ABCs of Diversifying Beyond SPY
Now that you know that the SPY ETF alone does not diversify your portfolio, here are the ABCs to diversifying your portfolio to maximize returns while SPY takes care of the risk.
A for artificial intelligence:
AI is the next secular trend shaping the future for everything from cars to home appliances to entertainment. And generative AI like ChatGPT opens far more possibilities. Thus, a good investment in generative AI is Microsoft, which found its next $1 trillion valuation in cloud computing in the 2010–2020 decade. It is now looking towards another trillion-dollar valuation in generative AI.
B for Bitcoin:
I would have said banks or buildings, but the U.S. commercial real estate market is not doing well. Instead of seeing a commercial REIT collapse, I would go for a Bitcoin ETF. Real estate is a relatively safe asset class. But decade-high interest rates paint a gloomy outlook for real estate companies that carry significant debt on their balance sheet. With the Bitcoin ETF, you get exposure to a new risky asset class that gives handsome rewards in a cyclical uptrend.
C for chips:
Running the entire digital show are semiconductors. And the ever-growing need for computing power makes chips the next oil of the digital revolution. The SMH ETF can give you competitive exposure to 25 top chip designers and manufacturers. Nvidia and TSMC make up for some of its top holdings. While the above two stocks and ETFs can give you exposure to a particular trend, the SMH can give you exposure to multiple secular trends like AI, autonomous cars, the Internet of things, 5G, drones, and robotics.
You can use SPY stock to stabilize your portfolio, and sector and commodity ETFs to maximize growth. At the same time, investing in a few no-brainer, large-cap stocks like Microsoft can make your diversification more fruitful.