According to recent SPIVA data, the majority of active fund managers haven’t managed to outshine the S&P 500 index over a 15-year period.
That’s quite the statistic and a strong argument for the indexing approach. For Canadian investors aiming to hitch their investments to the performance of this flagship American index, there are a variety of options.
Instead of attempting to outsmart the market, a strategy that often falls short, it’s worth considering aligning your investments with the steady and historically reliable growth of the S&P 500.
Let’s go over the three S&P 500 index exchange-traded funds (ETFs) that I believe stand out for those investing from Canada, each offering a unique blend of features to suit your investment style and goals.
The best overall
For those who favour simplicity and efficiency in their investments, BMO S&P 500 Index ETF (TSX: ZSP) stands out as a prime choice. With its low expense ratio of just 0.09%, investing $10,000 in ZSP means you’d only pay about $9 annually in fees — a small price for such broad market exposure.
What makes ZSP particularly appealing is its straightforward nature. It trades on the TSX in Canadian dollars just like any other stock, making it easily accessible without the hassle of currency conversion.
However, it’s worth noting that ZSP is not currency-hedged. This means its performance is linked to the fluctuating exchange rate between the Canadian dollar and the U.S. dollar. While the U.S. dollar’s rise against the Canadian dollar can bolster ZSP’s returns, the reverse could also detract from it.
The best currency-hedged ETF
In the long run, currency fluctuations tend to even out and have minimal impact on your investment’s growth trajectory. Still, if you’re concerned about short-term volatility or prefer not to take on currency risk, you might want to explore hedged options.
For this purpose, iShares S&P 500 Index ETF (CAD-Hedged) (TSX: XSP) is an excellent option. It mirrors the low expense ratio of 0.09% seen with ZSP, ensuring affordability remains a key feature.
The standout attribute of XSP is its currency-hedged structure, designed to minimize the impact of CAD/USD exchange rate volatility on your investment. You won’t benefit from a rising USD, but you won’t be hurt by a rising CAD, either.
By neutralizing the currency risk, XSP provides a smoother investment experience, especially appealing to those with a shorter investment horizon or a lower tolerance for currency-induced fluctuations.
The best for a RRSP
While ZSP and XSP offer convenient ways to invest in the S&P 500, they come with a caveat — the dividends from these Canadian-listed ETFs have been reduced 15% foreign withholding tax imposed on U.S. assets, which nibbles away at the income you receive.
For those with a Registered Retirement Savings Plan (RRSP), there’s a tax-efficient workaround: opt for a U.S.-listed S&P 500 ETF. By doing a currency conversion from CAD to USD, you can invest in an option like Vanguard S&P 500 ETF (NYSEMKT: VOO).
VOO’s U.S. listing and domicile mean it sidesteps the withholding tax within an RRSP, ensuring you keep more of what the fund earns. Plus, it boasts an even lower expense ratio of 0.03% compared to its Canadian counterparts, making it a more cost-effective choice over the long term.
