With the ongoing trade war with the U.S., it’s not hard to imagine many Canadian investors are feeling that “buy Canadian” mentality when it comes to investments. Indeed, many Canadians may already have more than their fair share in domestic equities (and bonds). However, there is a downside to not diversifying internationally, especially for Canadian investors who are heavily invested in TSX stocks and ETFs (Exchange-Traded Funds).
Indeed, owning a handful of Canadian-focused ETFs or mutual funds could leave you with very little exposure to the tech sector. We’re in an AI boom right now. And if you’ve just leaned on Canadian index funds, you may be at risk of missing out on the gains to be had from the boom. Undoubtedly, the S&P 500, a cap-weighted group of the top 500 U.S. stocks, has become heavily weighted towards tech, with the so-called Magnificent Seven titans now contributing a growing slice of the pie.
While it’s difficult to tell when tech (and AI winners) will slip next as they did briefly a few months ago and way back in the bear market of 2022, I do think that Canadian investors should seek to supplement their Canadian-focused portfolio with more international stocks, specifically U.S. names, to enhance returns potential.
So, if you’re like many domestically overexposed investors, with very little in the way of AI innovations and other trends, I think the following international ETF is worth a look.
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Vanguard S&P 500 Index ETF
With a weak loonie and lower price-to-earnings (P/E) ratios to be had on this side of the border, it’s understandable why many Canadian investors would rather take a raincheck on U.S. equities. That said, the S&P 500 still has the mix of AI beneficiaries that investors should seek to expose their portfolios to. And now that the Canadian dollar has gained a few cents relative to the greenback in recent months, I think it’s a good time to consider starting a position in the Vanguard S&P 500 Index ETF (TSX: VFV) if you have next to no exposure to the U.S. market.
Sure, you won’t get that dividend tax credit by investing in U.S. names. And, depending on the account you buy the VFV for, you may get dinged by a U.S. withholding tax (of 15%) on dividends. In any case, it’s the capital gains that will be the main attraction for Canadian investors.
The VFV has nearly doubled in the past five years while the TSX Index has gained just over 70%.
Indeed, the relative outperformance of the AI names and the Magnificent Seven is a significant reason why the American index has continued to stand tall, even in the face of some horrific geopolitical events. Nobody knows if the outperformance in U.S. markets will continue, but if you don’t have much (or any) exposure to the S&P 500 and the top tech titans at the top of the index, I think it’s going to be tough to beat the TSX Index.
Isn’t the S&P 500 getting pricey?
Yes, valuations on the S&P 500 are on the high end again after the latest leg higher. There’s no questioning that. And AI expectations are swelling again. But if Canadian investors can average into a position over the years, I do think they’ll be far better off as they seek greater benefits from the AI revolution. Also, if the loonie weakens again (perhaps a US$0.68 loonie is possible if the greenback experiences a bounce), the VFV, which is unhedged, stands to get a further boost.
In any case, there are more than a handful of ways to bet on the S&P 500 as a Canadian. Vanguard’s offering is one of my favourites for the rock-bottom management expense ratio (0.09%), the massive liquidity, and the enormous amount of trust investors have in the Vanguard brand.
