Let’s be honest. Most investors aim to generate consistent returns and build long-term wealth. As interest rates and bond yields are near record lows, equity markets remain the top bet for Canadians looking to beat inflation rates.
One of the smartest financial instruments that investors have at their disposal are ETFs or exchange-traded funds. An ETF is defined as a type of security that tracks an index, sector, commodity, or any other asset that can be traded on an exchange.
Compared to mutual funds, ETFs charge lower fees and are more liquid, and that is why they are fast gaining popularity. For Canadians looking at investing in ETFs, the ones that track the S&P 500 are promising bets given the index’s historical performance. This should come as no surprise considering that the S&P has beaten the TSX handsomely over the long-term.
The S&P 500 tracks the 500 largest public companies in the USA. The index is a lot more diversified than the TSX, with companies ranging from IT (information technology) to consumer staples and materials. In the last 10 years, the S&P 500 has returned 305.6% compared to the TSX 60 Index that is up just 115% in this period.
Here are 3 S&P 500 ETFs that Canadians should seriously consider for their investment goals:
Vanguard S&P 500 Index ETF
With an AUM (assets under management) of $4.5 billion as of April 30, 2021, the Vanguard S&P 500 Index ETF is one of the most popular funds in Canada that tracks the S&P 500. It has a very low MER (management expense ratio) of just 0.08%. Since it tracks the S&P 500 index, its return since inception mirrors the benchmark.
The benchmark has returned 18.14% while the VFV has returned 18.04%. The S&P 500 has 24.4% of tech companies and that is visible in the major holdings of the VFV as well. Microsoft accounts for 5% of the VFV while Apple (4.6%), Alphabet (3.3%), Amazon (3.2%), and Facebook (1.9%) make up the top 5 holdings of the ETF.
Berkshire Hathaway, Johnson & Johnson, JP Morgan Chase, Visa, and P&G round off the top 10 holdings. One important point to remember while investing in the VFV is that it is not tied to the Canadian dollar. If you want a fund that can act as a hedge for the CAD/USD, you might consider investing in the VSP. Buying the VFV means you are betting on a stronger US dollar.
iShares Core S&P 500 ETF
Managed by Blackrock, the IVV is a low-cost fund with an MER of just 0.03%. There are very few funds that offer such a low MER. Further, $10,000 invested in the fund during its inception in 2000 would be worth a little over $43,000 on June 1, 2021. Comparatively, its 10-year returns are 13.86%, while 5-year returns are 16.25% and 3-year returns are 16.74%.
In the last one year, the ETF has returned 56.31% compared to the benchmark’s (S&P 500) 56.35%. In fact, the IVV has one of the lowest tracking differences. If an ETF charges a 1% MER, its returns should trail the benchmark by 1% with all other things being equal. IVV’s median tracking difference is 0.03% according to ETF.com which is exactly the amount it charges as MER.
BMO S&P 500 Index ETF
The BMO S&P 500 Index ETF has $9.15 billion under management and charges an MER of 0.08%. It is one of the oldest ETFs in the market and has delivered a solid 18.46% since its inception in 2012. The ETF has given a return of 26.4% in the last year. “The ETF invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index,” says the website, and its holdings are the same as IVV.
At 1.37%, its dividend yield is the highest among the three ETFs on this list. The ETF is a highly liquid fund with an average of almost 400,000 shares getting traded daily.
The final takeaway
S&P 500 ETFs are a great option for investors who are new to markets as they give them exposure to the largest public companies on the index without undue exposure to any one sector. It is also great for experienced investors who can use ETFs as a hedge against their F&O trades.
The S&P 500 is one of the top indexes in the world and will give you exposure to trillion-dollar giants including Apple, Amazon, and Microsoft, thereby diversifying your investments and lowering your risks significantly.