Canadian Investors: Don’t Put All Your Eggs in the SPY Stock Basket

Investing in the SPY index has allowed investors to deliver inflation-beating returns in the past decade. But is the index still a good buy?

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Caution, careful

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Several Canadian investors are turning to the stock markets in the U.S. to derive outsized gains. Since the financial crash of 2008-09, equity markets south of the border have delivered inflation-beating returns to shareholders on the back of lower interest rates, widening corporate earnings, and the rise of mega-cap tech stocks.

For instance, the S&P 500 (SPY) index has returned an emphatic 626% to shareholders in dividend-adjusted gains in the past 15 years. In this period, the TSX index has gained “just” 284%. So, an investment of $10,000 in the SPY in late 2008 would be worth close to $73,000 today, while a similar investment in the TSX index would have ballooned to $38,400.

Can the SPY index continue to deliver outsized gains?

While the SPY index has generated game-changing wealth for long-term investors, can it continue to outpace other indices in 2024 and beyond?

The S&P 500 is a diversified index that offers you exposure to the 500 largest companies in the U.S. Additionally, the index is weighted on the basis of a company’s market cap. So, if the total market cap of the index is $100 trillion and a particular company is worth $1 trillion, it will account for 1% of the index.

In the last few years, the astronomical rise of mega-cap stocks such as Apple, Amazon, Microsoft, Alphabet, Nvidia, Meta, and Tesla has meant the SPY has significant exposure to the tech sector. In fact, the “Magnificent Seven” stocks now account for 25% of the SPY, reducing overall diversification in the process.

Additionally, while each of these companies enjoys wide competitive moats, entrenched positions in growing markets, and a widening base of earnings, big tech might not be able to grow at historical rates due to their sheer size.

Given these factors, Canadian investors should look to diversify their investments further by investing in ETFs (exchange-traded funds) such as iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC).

An overview of the XIC ETF

You can own the entire Canadian market at a low cost by investing in the XIC ETF. This ETF has returned 9.22% annually in the last five years, while annual returns stand at 7.5% in the last 10 years.

With $9.9 billion in assets under management, the XIC is among the most popular ETFs in Canada. It holds TSX giants, such as Royal Bank of Canada, Toronto-Dominion Bank, Shopify, Enbridge, and Canadian National Railway.

While the S&P 500 is tech-heavy, the top two sectors for the XIC include financials and energy, which cumulatively account for 48% of the ETF. Moreover, the information technology sector accounts for less than 9% of the ETF, making it ideal for those with a sizeable exposure to the SPY index.

With 226 holdings, the XIC is well diversified and also offers shareholders a dividend yield of 3.3%, much higher than the SPY index, which yields less than 1.5%. Additionally, with an expense ratio of 0.06% and a management fee of 0.05%, the XIC is among the cheapest ETFs trading on the TSX.

The Foolish takeaway

Index investing is the best way for most investors to gain exposure to the equity markets. Investing in the SPY and XIC funds provides you access to some of the best companies in North America across sectors and geographies.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Fool contributor Aditya Raghunath has positions in Enbridge. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Alphabet, Amazon, Apple, Canadian National Railway, Enbridge, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

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