The S&P 500 is the standard by which many equity investments are measured. As the world’s most followed stock market index, it is easy to invest in through index funds. The decision to make such an investment is often a good one: over the years, the S&P 500 has outperformed 95% of equity fund managers and most of the world’s global indexes.
With that being said, the S&P 500 isn’t “guaranteed” to outperform forever. There were many periods in which it underperformed other indexes, such as in the 1970s, when it lagged behind Japan’s Nikkei.
While nothing is ever certain, today could be the beginning of one of those periods. The S&P 500’s price-to-earnings (P/E) ratio is currently 25, which is higher than the same ratios for Canadian, European, and Chinese markets. As far as Canadian markets go, while they aren’t dirt cheap, they’re definitely cheaper than U.S. markets. In this article, I will explore one Canadian index fund that could be a better buy than the S&P 500 today.
The TSX Composite Index Fund
iShares S&P/TSX Composite Index Fund (TSX: XIC) is an ultra-diversified fund of Canadian stocks. Holding 240 shares, it has enough diversification to minimize your risk considerably. The fund is somewhat concentrated like the S&P 500 is: it is dominated by banks, with three of the top 10 stocks being financials. Some say that that’s a bad thing, but banking is an out-of-favour sector today, with many top financial institutions trading at just 12 times earnings. It’s a good sector to be buying.
A nearly 3% yield
One attractive feature XIC has right now is high dividend income. At today’s price and using trailing 12-month (TTM) dividends, XIC yields 2.8%. That is nearly double the S&P 500’s dividend yield. Now, you can never be sure whether dividends will increase again in the future after they did so in the past. However, the economy has been pretty resilient lately, and the banks don’t have overly high payout ratios. I’d say you can count on XIC’s dividends being paid long term.
High diversification
As mentioned previously, XIC features high diversification, with 240 stocks. Studies show that you need 25 stocks to capture the statistical risk-reducing benefit of diversification. So, with XIC, you can sleep comfortably, knowing that your unsystematic risk (i.e., the risk in an individual company) has been diversified away.
Low fees
Last but not least, XIC has a low fee. Its management expense ratio (MER) is 0.05%, while its total expense ratio is 0.06%. These fees are so low that they most likely won’t impact your returns by more than a percent or two over an entire investing lifetime.
Foolish takeaway
The S&P 500 is popular for a reason. Featuring some of the world’s best tech companies and having outperformed most other indexes over the years, it has stood the test of time. That doesn’t mean it’s the only investment you should have in your portfolio, though. Global stocks, Canadian stocks and bonds all merit a place as well. If you feel you’re a little too exposed to the U.S. at the moment, an investment in XIC might be right for you.
