As of June 6, there are 1,454 exchange-traded funds (ETFs) listed in Canada, and that number is increasing weekly. Yet, out of this vast array, I hold only two. Why?
Both ETFs track the S&P 500 index, which, according to the S&P Indices Versus Active study (SPIVA), has outperformed over 88% of all U.S. funds over the last 15 years.
Here’s a closer look at my top picks. These ETFs are not just strong performers; they are also perfect for long-term, tax-free compounding within a Tax-Free Savings Account (TFSA).
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VFV
First up is Vanguard S&P 500 Index ETF (TSX: VFV), which tracks the S&P 500 index at a very low management expense ratio (MER) of 0.09%.
This means if you invest $10,000, your annual fees would only be around $9—a small price for access to some of the largest and most influential companies in the U.S.
VFV trades in Canadian dollars, which simplifies the investment process as there’s no need for currency conversion. With shares priced around $130, you gain exposure to 500 major U.S. stocks through a single ETF ticker.
It’s also one of the most popular ETFs in Canada, with more than $14 billion invested, and the number continues to grow.
VSP
I also hold Vanguard S&P 500 Index ETF (CAD-hedged) (TSX: VSP) in the same proportions as VFV. Why?
Well, while VFV offers direct exposure to the S&P 500, it is not currency-hedged. This means that when the U.S. dollar (USD) strengthens against the Canadian dollar (CAD), VFV gains additional value, but when the CAD strengthens, VFV loses value.
However, VSP is currency hedged. This means that its performance aims to reflect only the changes in the S&P 500 index, independent of currency fluctuations between the USD and CAD.
This hedging mechanism provides a layer of protection against currency volatility, ensuring that the ETF’s performance is solely tied to the stock index movements and not swayed by currency exchange rates.
Given the current state where the USD is trading high against the CAD, having a currency-hedged ETF like VSP provides a beneficial balance in my investment strategy.
The Foolish takeaway
Both VFV and VSP can be excellent holdings for long-term TFSA investors who are comfortable with a higher level of risk.
The key to success with either of these ETFs is consistent investment. Regular contributions, coupled with the prompt reinvestment of quarterly dividends, can significantly enhance the compounding effect over time.
Finally, avoid the urge to panic sell during downturns. Remember, these ETFs track the overall performance of the S&P 500, which has shown strong long-term growth despite periodic setbacks.
