When it comes to the passive side of your portfolio, I like to set and forget. Indeed, for those stock pickers who also have a hands-off ETF side (I do think that it makes sense to embrace ETF investing as well as stock picking), sometimes it just makes sense to have a big piece of the market so that you can cover your blind spots when picking your own names.
Indeed, whenever you own a big chunk of the S&P 500, TSX Index, or even international markets alongside a mix of sector ETFs, I think you can enhance your diversification without having to worry all too much when it comes to your stock portfolio.
Of course, the right allocation to certain sectors, industries, and geographies will differ for everyone. In this piece, we’ll check in on two Canadian ETFs that I believe ought to find a home in a Canadian investor’s ETF portfolio.
For me, they’re non-negotiable and must-adds, especially when prices are down and investors are more than willing to throw in the towel in favour of bonds, cash, and GICs. These days, stocks are in favour and valuations aren’t exactly dirt-cheap, but, at the same time, there are good reasons why the market is a little bit on the expensive side.
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Betting on U.S. stocks for the long term as a Canadian
The AI revolution has a lot of promise, and though historically hefty valuation metrics may act as a red flag for some, I’d argue that there is far more to investing and assessing risk than just looking at a single figure and comparing it to the historical averages. Indeed, the S&P 500 is historically expensive, but could the AI revolution drive earnings and productivity growth that allows corporate America to grow into its premium price tag?
Time will tell. I’d say that the market (specifically the U.S. market) isn’t as overvalued as it looks on the surface. And, in that regard, I find an S&P 500 ETF to be an absolute staple for a Canadian investor’s portfolio, especially those who are TSX-heavy, with limited exposure to the AI innovation south of the border.
Just about any S&P 500 ETF would do for Canadian investors. That said, depending on whether we’re talking about a non-registered account, a TFSA, or an RRSP, there’s an ETF that’s a better fit.
Betting on the U.S. markets with S&P 500 ETFs
For outside of an RRSP (think a TFSA), I prefer the Vanguard S&P 500 Index ETF (TSX: VFV). For those who expect the Canadian dollar to strengthen (at just over US$0.70, I do think the case for betting on a bounce in the loonie makes sense), I like the CAD-hedged variant of the VFV, the Vanguard S&P 500 Index ETF (CAD-Hedged) (TSX: VSP).
Of course, in normal circumstances, I think the unhedged version is the best and most cost-effective. But with the loonie at a bit of a low point, I’d say that a rally over the medium term could be in the cards and that has me favouring the VSP over the VFV by the slightest of margins. If there’s ever been a time to hedge, I think it’s the current climate when the U.S. dollar is relatively hot.
