Investing in U.S. stocks will help Canadians gain exposure to some of the world’s largest companies and help them benefit from geographic diversification. In this article, I provide Canadian equity investors with a strategy to allocate $5,000 in U.S. stocks right now.
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Invest in this S&P 500 ETF
In the last six decades, the S&P 500 index has delivered annual returns of 10% on average, allowing investors to generate inflation-beating returns over time. Additionally, over 85% of the mutual fund managers on Wall Street have failed to beat this flagship index.
Given these factors, Canadian investors should allocate at least 80% of their equity investments in low-cost index funds that track the S&P 500 index. One such exchange-traded fund (ETF) is iShares S&P 500 Index ETF (TSX: XSP), which was launched in May 2010. In the last 15 years, the XSP ETF has returned 311% to shareholders. If we adjust for dividend reinvestments, cumulative returns are closer to 441%.
So, an investment of $4,000 in the XSP ETF back in 2010 would be worth close to $21,600 today. While past returns don’t matter much to current or future investors, the S&P 500 is positioned to deliver steady gains in 2025 and beyond. For instance, adjusted earnings for the S&P 500 are expected to grow by more than 10% annually in 2025 and 2026 despite the ongoing trade war, inflation, and a higher interest rate environment.
Invest in undervalued growth stocks
While low-cost index funds should form the core of your equity portfolio, those with a higher risk appetite could consider gaining exposure to quality growth stocks trading at reasonable valuations.
Generally, growth stocks deliver outsized gains in a bull run but also underperform significantly when sentiment turns bearish. One such company is AppLovin (NASDAQ: APP), which has a market capitalization of US$94 billion.
AppLovin is a software platform that operates in two key segments: Advertising and Apps. It provides tools for mobile app developers and marketers to grow their businesses through targeted advertising, measurement, and monetization solutions. Its portfolio includes AppDiscovery for matching advertisers with publishers, MAX for in-app bidding optimization, Adjust for analytics and measurement, and Wurl for connected TV streaming distribution. Through these integrated services, AppLovin enables businesses to acquire users, effectively monetize their apps, and optimize marketing campaigns across mobile and connected TV environments.
AppLovin stock went public in April 2021 and has since returned 300% to shareholders. However, the tech stock is also down 46% from all-time highs, allowing you to buy the dip.
Analysts tracking APP stock expect its revenue to increase from US$4.70 billion in 2024 to US$9.5 billion in 2028. Like other tech companies, AppLovin is asset-light and benefits from operating leverage. The company’s adjusted earnings are forecast to expand from US$5.69 per share in 2024 to US$12.14 per share in 2028.
Since its initial public offering, AppLovin stock has traded at a forward price-to-earnings multiple of 27 times. If it trades at a price-to-earnings multiple of 30 times, APP stock will trade around US$375 per share in early 2028, indicating an upside potential of over 35% from current levels.
Canadian investors should identify other such growth stocks further to diversify their growth portfolio and lower overall risk.
