I love introducing my readers to cool and advanced exchange-traded funds (ETFs), but when it comes to building the core of a long-term buy-and-hold portfolio, I always come back to the tried-and-true S&P 500 index.
And the best part? Today, it’s cheaper than ever to invest in this iconic benchmark. Here’s why it’s a must-have for your portfolio and how you can get started.
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Why the S&P 500?
The S&P 500 represents 500 of the largest U.S. stocks, selected based on specific criteria like liquidity, size, and earnings by a committee of experts. It’s not just tech or healthcare—it covers all 11 market sectors, giving investors diversified exposure to the entire U.S. economy.
What sets the S&P 500 apart is that it’s market cap-weighted. This means the larger a company, the higher its allocation in the index. For example, tech giants make up a bigger slice of the pie compared to smaller real estate companies.
Here’s why it’s tough to beat: over the past decade, 84.71% of all large-cap funds failed to outperform the S&P 500, according to SPIVA. If most professional fund managers—whose sole job is to beat this index—can’t do it, chances are retail investors like you and I won’t fare much better either.
The S&P 500 is a proven performer, and for long-term investors, it’s hard to argue against its reliability.
How to invest in the S&P 500
Canadian investors can easily invest in the S&P 500 using BMO S&P 500 Index ETF (TSX: ZSP). This ETF directly replicates the index by holding the same stocks, offering broad exposure to U.S. large-cap companies.
It’s also very affordable, with a 0.09% management expense ratio (MER)—meaning you’d only pay $9 annually for every $10,000 invested.
There are a few things to keep in mind. Since ZSP invests in U.S. stocks, 15% of its dividends are subject to U.S. foreign withholding tax, even in tax-advantaged accounts like a Tax-Free Savings Account or Registered Retirement Savings Plan. This happens automatically and is deducted in the background, so there’s no action required on your part, but it’s something to consider.
Additionally, ZSP is unhedged, so its performance is influenced by currency fluctuations. If the U.S. dollar strengthens against the Canadian dollar, ZSP will benefit. However, if the Canadian dollar strengthens, ZSP’s returns could be impacted.
For investors who want to avoid this, BMO S&P 500 Hedged to CAD Index ETF (TSX: ZUE) offers the same exposure with currency risk neutralized, all for the same 0.09% MER.
Both options provide an efficient and low-cost way to invest in the S&P 500, whether you want to embrace or avoid currency risk.
