Canadian investors looking for S&P 500 exposure through Vanguard have two main options: the Vanguard S&P 500 Index ETF (TSX: VFV) and the Vanguard S&P 500 Index ETF (CAD-hedged) (TSX: VSP). Both ETFs are highly popular and have long track records.
The difference is clear in the names: one is hedged to the Canadian dollar, the other is not. But what does that actually mean for your expected returns, and which one should investors pick? Here’s my breakdown.
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What’s the same
Both ETFs track the S&P 500 Index, which holds 500 of the largest U.S. companies by market capitalization. They also both work the same way. Each holds units of the underlying U.S.-listed Vanguard S&P 500 ETF, making them “fund of funds” structures.
VFV and VSP both charge a rock-bottom 0.09% management expense ratio, making them among the cheapest ways to get U.S. equity exposure in Canada. For a $10,000 investment, that’s around $9 a year in fees.
Both also lose 15% of dividends to U.S. foreign withholding tax. This can’t be avoided by holding VFV or VSP in a Registered Retirement Savings Plan (RRSP) as both ETFs are Canadian-domiciled, but it’s a small drag.
What’s the difference
The main distinction is in currency exposure. VFV is unhedged, meaning its returns reflect both the performance of the S&P 500 and movements in the U.S. dollar against the Canadian dollar. If the USD appreciates relative to CAD, VFV can outperform the index in Canadian-dollar terms. But if CAD strengthens, VFV can underperform.
VSP uses derivatives called currency forwards to hedge against U.S. dollar fluctuations. This reduces currency-related volatility and shields returns from CAD appreciation, but it also means you won’t benefit if the USD rises. Hedging adds a slight cost, but for some investors, the reduced currency risk is worth it.
The Foolish takeaway
Buy VFV if you believe the U.S. dollar will continue to outperform the Canadian dollar over time. Buy VSP if you think the opposite. If you’re unsure, consider splitting your allocation 50/50 and rebalancing periodically. This way, you can systematically sell high and buy low between the two.
Personally, my preference is VFV. I don’t like the constant drag from currency hedging, and over the long term, foreign exchange fluctuations tend to even out. Short-term swings in CAD/USD are just daily noise, so if VFV’s performance temporarily diverges from the S&P 500 because of currency moves, I don’t panic.
