If you’re looking to invest in the U.S. stock market but prefer not to pick individual stocks, exchange-traded funds (ETFs) offer an easier and highly effective way to diversify your portfolio.
You can choose ETFs that track major indices like the Nasdaq 100 or the S&P 500, providing you with exposure to a broad range of top U.S. companies through a single investment.
However, not all ETFs are created equal. Differences in management styles, fees, and the specific indexes they track can significantly impact your potential returns.
Here’s my top pick for the smartest S&P 500 ETF to invest $500 in right now, along with the reasons why this particular ETF stands out from the rest.
Why I’m not picking a Canadian ETF
Now, if you’re not investing within a Registered Retirement Savings Plan (RRSP) or don’t have a cost-effective way to convert Canadian dollars to U.S. dollars, you might want to stop reading here. Otherwise, continue!
Firstly, Canadian ETFs that track U.S. markets tend to be much more expensive. For instance, a Canadian ETF that covers the U.S. total market might charge around 0.16% per year.
While this fee might not seem excessively high, it’s important to consider that it only offers the same exposure as a U.S.-listed ETF, which might charge as little as 0.03%. This difference in expense ratios can add up significantly over time.
Additionally, there’s the issue of foreign withholding taxes. Canadian ETFs holding U.S. stocks are subject to a 15% withholding tax on dividends. In contrast, if you hold U.S. ETFs directly in an RRSP, this withholding tax can be avoided altogether.
Managing taxes and fees effectively are two of the most straightforward ways to enhance your net returns. By choosing U.S.-listed ETFs and using accounts like the RRSP strategically, you can minimize these costs.
My ETF to invest $500 in
Check out SPDR Portfolio S&P 500 ETF (NYSEMKT:SPLG). With a 0.02% expense ratio, it is as dirt-cheap as ETFs get in North America.
Now, cheap doesn’t mean bad here. For a mere $2 in annual fees, you get exposure to 500 large-cap U.S. stocks represented by the S&P 500 index.
Over the last 10 years, SPLG has returned an annualized 12.29% with dividends reinvested. Going back to its inception on November 8, 2005, it’s delivered an annualized 10.15%.
Here’s an idea: use SPLG as the low-cost core of your RRSP as a “set-it-and-forget-it” investment. Then, you can try your hand at picking some Canadian dividend stocks in a Tax-Free Savings Account (and the Fool has some great ideas below).
