Five hundred companies sounds like plenty. That’s the appeal of the Vanguard S&P 500 Index ETF (TSX: VFV). One purchase gives Canadian investors exposure to many of the largest businesses in the United States. For a Tax-Free Savings Account (TFSA) built to grow for decades, that’s a strong starting point.
The question is whether it should also be the ending point.
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VFV
VFV tracks the S&P 500, so investors get large U.S. companies across technology, healthcare, financials, consumer products, industrials, and other sectors.
Meanwhile, the cost is tiny. Vanguard currently lists a management expense ratio (MER) of 0.08%. That means roughly $8 annually for every $10,000 invested, before other trading costs. Yet there is one detail investors shouldn’t miss.
VFV is 100% U.S. equities. Owning 500 companies reduces the damage any single business can cause. It doesn’t protect against one country, currency, or group of mega-cap stocks having a rough stretch.
Bigger at the top
Market-cap weighting means the largest companies receive the largest positions. As of August 31, Nvidia represented 8.1% of VFV. Apple was 7%, while Microsoft was 5.7%. Those three companies alone represented almost 21% of the fund.
| COMPANY | VFV WEIGHT |
|---|---|
| Nvidia | 8.1% |
| Apple | 7.0% |
| Microsoft | 5.7% |
| TOP THREE | 20.8% |
Expand that to VFV’s 10 largest holdings and the weight reaches roughly 37.8%. That isn’t necessarily bad. Those companies became enormous because the businesses produced enormous results. Market-cap weighting also lets winners grow naturally without a fund manager deciding who deserves more money.
The risk comes when investors assume how ETFs work means every dollar is spread evenly across hundreds of companies, when it isn’t.
What’s missing
The obvious missing piece for a Canadian investor is Canada. Vanguard FTSE Canada All Cap Index ETF (TSX: VCN), for example, holds about 212 Canadian companies and charges a 0.05% MER. That adds exposure to sectors Canada does particularly well, including financials, energy, materials, and pipelines.
Then there’s the rest of the world. Vanguard FTSE Developed All Cap ex North America Index ETF (TSX: VIU) owns more than 3,600 companies outside Canada and the United States. Japan represents about 24% of the portfolio, followed by the United Kingdom, South Korea, France, Switzerland, and Germany.
Suddenly the portfolio isn’t depending entirely on what happens in New York.
TFSA considerations
Someone with decades before needing the money could decide VFV alone provides enough diversification for their goals. There’s nothing automatically wrong with making a large bet on U.S. large-cap businesses. Yet I’d make that decision knowingly.
Investors holding VFV inside a TFSA can generally keep eligible Canadian investment growth and withdrawals tax-free. However, U.S. dividends received through a Canadian-listed ETF can still face foreign withholding tax inside the fund.
Currency matters too. VFV isn’t currency hedged, so movements between the Canadian and U.S. dollar can help or hurt returns measured in Canadian dollars. Those aren’t reasons to avoid it, just part of understanding what you own.
Bottom line
VFV could absolutely form the core of a TFSA. I just wouldn’t automatically make it the entire portfolio. Adding Canadian equities can reduce dependence on the U.S. while increasing exposure to banks, energy, and materials. International equities can add thousands of businesses operating in economies that won’t always rise and fall alongside America.
VFV already gives investors an excellent collection of companies. The next step isn’t buying more ETFs for the sake of collecting tickers. It’s filling the gaps VFV intentionally leaves open.
