I’m a big proponent of Vanguard S&P 500 Index ETF (TSX: VFV), where all my Canadian income is invested.
With a low fee of just 0.09%, it provides broad exposure to the S&P 500 index, which has historically outperformed about 88% of all large-cap U.S. stock mutual funds over the last 15 years.
However, as much as I value VFV for its robust performance and simplicity, it isn’t the perfect fit for everyone. Depending on your financial goals and personal preferences, there might be better options out there.
Let’s explore an alternative exchange-traded fund (ETF) that could potentially offer you more tailored benefits than the S&P 500.
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Why not the S&P 500?
The S&P 500 is a market-cap-weighted index, which means that companies with larger market capitalizations (share price x shares outstanding) have a bigger influence on the index’s performance.
Essentially, the movement of these larger companies can significantly sway the overall direction of the index. This approach is common in many major indexes because it reflects the proportional impact of larger companies on the economy.
However, it’s important to clarify that the S&P 500 includes 500 large U.S. companies, not necessarily the largest. These companies are selected based on a range of criteria, including liquidity and earnings stability, and are assessed by a committee.
Despite its broad coverage, the S&P 500 primarily captures the performance of large-cap stocks and consequently misses out on a substantial number of mid-sized and small-sized U.S. companies.
This exclusion means that the index doesn’t encompass the entire economy, particularly the more volatile and potentially higher-growth segments represented by smaller firms.
Historically, these smaller companies have provided a “size” premium—potentially higher returns due to their greater risk profiles.
Which ETF to buy instead
If you’re aiming for exposure to the entire U.S. market, encompassing large-, medium-, and small-cap stocks, the ETF to consider is Vanguard U.S. Total Market Index ETF (TSX: VUN).
This ETF provides a comprehensive view of the American market by tracking the CRSP US Total Market Index. With an expense ratio of just 0.16%, VUN offers a cost-effective way to diversify across approximately 3,700 holdings.
In terms of top holdings, it still looks very similar to the S&P 500 and historically has performed virtually identically.
However, you get a potential performance boost from the addition of mid- and small-caps, but keep in mind this effect is relatively minor and only appears over long holding periods.
