The Vanguard S&P 500 Index ETF (TSX: VFV) is one of the most popular exchange-traded funds (ETFs) in Canada.
With about $28.3 billion in assets under management and a very low 0.09% expense ratio, it has become a go-to option for Canadians looking to invest in U.S. stocks. The ETF tracks the S&P 500, though returns are slightly reduced by the 15% foreign withholding tax applied to U.S. dividends.
But while VFV is extremely popular, it is far from the only way to gain exposure to U.S. equities.
Depending on your investment goals and tolerance for risk, there may be better alternatives available. Some ETFs offer broader diversification, others address currency risk, and a few even come with slightly lower fees.
Here are three low-cost and diversified U.S. equity ETFs that Canadians may want to consider instead of VFV.
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Buy the total U.S. stock market
The iShares Core S&P U.S. Total Market Index ETF (TSX: XUU) expands beyond the typical large-cap focus of VFV.
While VFV holds about 500 large-cap companies, XUU tracks the S&P Total Market Index, which includes over 1,000 stocks across the entire U.S. market. This means the portfolio contains large, mid, and small-cap companies.
That broader reach adds an extra layer of diversification and gives investors exposure to smaller companies that may grow faster than the largest firms in the S&P 500.
Another advantage is cost. XUU charges a very low 0.07% management expense ratio, making it even cheaper than VFV.
For investors who prefer a “buy the entire market” approach rather than concentrating on large caps, this ETF can be an attractive option.
Large caps but cheaper
Another affordable option for U.S. equity exposure is the TD U.S. Equity Index ETF (TSX: TPU).
This ETF tracks the Solactive U.S. Large Cap Index and holds just over 500 companies. While it is not technically the S&P 500, the portfolio is very similar in terms of company size and sector composition.
The main difference is the benchmark methodology used to select and weight the holdings.
One appealing feature of TPU is its low cost. The ETF charges a management expense ratio of only 0.07%, matching the fee level of XUU while still focusing on large-cap U.S. companies.
Because the index differs slightly from the S&P 500, TPU can also serve as a useful tax-loss harvesting partner for investors who already hold VFV in a taxable account.
S&P 500 hedged to Canadian dollars
One quirk of VFV is that it holds U.S. stocks priced in U.S. dollars while the ETF itself trades in Canadian dollars.
Because of that structure, exchange rate movements can influence returns. When the U.S. dollar strengthens, VFV tends to benefit. When the Canadian dollar rises, the ETF can face a headwind.
Some investors prefer to remove this currency effect altogether. The BMO S&P 500 Hedged to CAD Index ETF (TSX: ZUE) does exactly that by hedging the U.S. dollar exposure back to Canadian dollars.
This means movements in the exchange rate should have little impact on performance. A rising U.S. dollar won’t help the ETF, but a stronger Canadian dollar won’t hurt it either.
The fund is also reasonably large with about $4.1 billion in assets under management and carries the same 0.09% expense ratio as VFV.
