According to the S&P Indices Versus Active (SPIVA) report, over the last decade, 84.7% of large-cap U.S. stock funds have underperformed the S&P 500 Index.
If your aim is to avoid falling into that underperforming bracket, one straightforward strategy is to invest directly in the S&P 500 itself.
Here are three exchange-traded funds (ETFs) that track this famed index, each suitable depending on the type of investment account you’re using.
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RRSP investors
If you’re investing through a Registered Retirement Savings Plan (RRSP), consider the Vanguard S&P 500 ETF (NYSEMKT:VOO) traded in USD.
This is a savvy move because U.S. stocks and ETFs in an RRSP are exempt from the 15% foreign withholding tax on dividends. This means more of your investment return ends up in your pocket, not the taxman’s.
For those concerned about currency conversion fees, using a brokerage like Interactive Brokers can minimize these costs, as they offer more reasonable rates compared to many others.
Moreover, VOO stands out for its low cost. With a management expense ratio (MER) of only 0.03%, you’re looking at just $3 in fees per $10,000 invested.
TFSA investors
For Tax-Free Savings Account (TFSA) investors, the 15% foreign withholding tax on dividends from U.S. stocks and ETFs applies regardless, so opting for a Canadian-listed ETF like the BMO S&P 500 Index ETF (TSX:ZSP) simplifies things.
ZSP holds the same large-cap U.S. stocks as its American counterparts like VOO, but there’s no need to worry about converting your CAD to USD, which can save on currency exchange fees.
While ZSP is slightly more expensive than some U.S.-listed options, with a management expense ratio (MER) of 0.09%, it’s still a cost-effective choice.
However, it’s important to note that ZSP is affected by currency exchange rates. Generally, if the USD strengthens against the CAD, ZSP’s value increases; conversely, if the CAD strengthens, ZSP’s performance might lag.
Non-registered investors
In a non-registered, taxable account, consider the Global X S&P 500 Index Corporate Class ETF (TSX:HXS) for a tax-efficient investment approach.
What makes HXS unique is that it doesn’t distribute dividends. Instead, it uses a derivative called a total return swap to replicate the total returns of the S&P 500 Index, which includes both price appreciation and dividends reinvested.
This structure means you won’t have to report and pay taxes on dividends each year because HXS does not pay any. Your tax obligation is limited to capital gains tax only when you eventually sell your shares.
This can be a significant advantage for those looking to minimize their annual tax burden while still capturing the full growth potential of the S&P 500.
