What Are S&P 500 ETFs and How to Invest in S&P ETF in Canada?
S&P 500 ETFs are an extremely attractive investment option in Canada. The S&P 500 Index represents the combined performance of 500 large publicly traded companies in the United States, covering leading enterprises across various industries. S&P 500 ETFs are exchange-traded funds that closely track this index, providing investors with a convenient and cost-effective way to gain broad market exposure to large U.S. companies. This helps in diversifying portfolio risk and pursuing potential long-term gains.
For Canadians, investing in S&P 500 ETFs is easier than ever, with a multitude of options available through Canadian brokerages. Whether you're investing through a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP), these ETFs can be a tax-efficient way to grow your wealth over the long term.
But how to invest in S&P ETF in Canada? Don’t worry, this article will walk you through the types of S&P 500 ETFs in Canada, pros and cons of investing in S&P 500 ETFs and teach you how to invest in S&P ETF in Canada. So, keep reading!
What are S&P ETFs?
A popular market-capitalization weighted index, the S&P 500 was created in 1957 and consists of 500 large-cap U.S. corporations from all 11 market sectors. These companies account for about 80% of the total market capitalization of the U.S. stock market.
Since investors can't invest directly in an index, they turn to mutual funds or ETFs that track the S&P 500. These ETFs hold a "basket" of the underlying S&P 500 stocks, mirroring their respective weights in the index, to track its performance. The difference in returns between the S&P 500 index and an ETF is called "tracking error," which can be positive or negative. Investors pay a management expense ratio (MER) for this service, which is a small annual fee covering the costs of managing the ETF.
S&P 500 ETFs also provide periodic distributions from the dividends of the underlying stocks, typically paid quarterly. However, Canadian-listed S&P 500 ETFs face a 15% foreign withholding tax on dividends from U.S. stocks. To avoid this tax, investors can purchase U.S.-listed S&P 500 ETFs or stocks and hold them in a Registered Retirement Savings Plan (RRSP). This strategy allows Canadian investors to benefit from the growth and diversification provided by the S&P 500 while minimizing the tax impact.
Types of S&P 500 ETFs in Canada
In Canada, S&P 500 ETFs can be divided into two main categories: hedged ETFs and unhedged ETFs. Each type has different characteristics to suit different investor preferences, mainly around currency impact and exchange rate risk.
Hedged ETFs
Currency impact: These ETFs use currency hedging strategies to reduce the impact of CAD-USD exchange rate fluctuations.
Exchange rate risk: By hedging currency risk, these ETFs aim to provide returns that closely track the S&P 500, minimizing the effect of exchange rate volatility.
Best for: Hedged ETFs are particularly suitable for investors who prioritize stability and want to mitigate the risk associated with currency fluctuations.
Example S&P 500 ETF: Vanguard S&P 500 Index ETF (CAD-hedged). By choosing a hedged ETF like the Vanguard S&P 500 Index ETF (CAD-hedged), Canadian investors can ensure that their investment outcomes more closely match with the actual performance of U.S. stocks without being affected by currency exchange rate fluctuations.
Unhedged ETFs
Currency impact: These ETFs do not hedge against currency fluctuations, exposing investors to CAD-USD exchange rate changes.
Exchange rate risk: Investment returns can be positively or negatively influenced by currency fluctuations.
Best for: Canadian investors comfortable with exchange rate risk who believe that currency fluctuations could potentially enhance their returns.
Example S&P 500 ETF: VFV is suitable for investors who seek to achieve long-term capital appreciation by investing in the U.S. stock market. It is particularly attractive to those who can tolerate currency risk and want to find growth opportunities in large U.S. companies.
Pros and cons of investing in S&P 500 ETFs in Canada
When considering investment options in the stock market, S&P 500 ETFs are a great option for Canadian investors seeking exposure to the U.S. stock market. These ETFs offer a variety of benefits, such as diversification and cost-effectiveness, but they also come with certain risks and limitations.
Understanding the pros and cons of investing in S&P 500 ETFs is critical for Canadian investors to make an informed decision that aligns with their financial goals and risk tolerance.
Here’s a breakdown of the pros and cons of investing in S&P 500 ETFs in Canada.
Pros of investing in S&P 500 ETFs in Canada
Cost-effectiveness: Compared to investing directly in U.S. stocks or actively managed funds, the management fees of S&P 500 ETFs are generally lower. This is because the operation of an ETF mainly involves tracking the index, which requires less active management and research costs.
Diversification: The S&P 500 Index includes 500 large publicly traded companies in the United States, covering various industries. By investing in an S&P 500 Index ETF, Canadian investors can simultaneously invest in a wide range of companies across different industries and sizes, effectively diversifying their investment risk and avoiding excessive impact on their portfolio from the volatility of a single stock.
High Liquidity: S&P 500 ETFs are traded on stock exchanges and have high liquidity. Investors can buy and sell them at any time during trading days, making the transaction process simple and fast, with relatively low transaction costs.
Dividend income: Many S&P 500 companies pay dividends, and these ETFs pass on those dividends to investors, providing a potential source of income.
Cons of investing in S&P 500 ETFs in Canada
Currency risk: For Canadian investors in unhedged S&P 500 ETFs, fluctuations in the CAD-USD exchange rate can impact returns. A strengthening Canadian dollar could reduce the value of U.S. investments when converted back to CAD.
Sector concentration risk: Although the S&P 500 covers a wide range of sectors, certain sectors have significant weightings, such as technology, which may lead to sector concentration risk if these sectors experience downturns.
Limited exposure to small-cap and international stocks: The S&P 500 focuses on large-cap U.S. companies, which means Canadian investors may miss out on potential growth opportunities in small-cap or international markets.
Market risk: Although investing in S&P 500 ETFs can diversify the risks of individual stocks, it still cannot avoid the risks brought by overall market fluctuations. When the US stock market falls sharply or the economy goes into recession, the price of S&P 500 ETFs will also fall, causing investors' assets to shrink.
How to choose an S&P 500 ETF?
For Canadian investors, there are several key factors to consider when choosing an S&P 500 ETF:
1. Expense ratio
In Canada, different financial institutions or fund companies offer different expense ratios for S&P 500 ETFs. The expense ratio includes various fees such as management fees and custody fees. A lower expense ratio is crucial for long-term investments because even small differences in fees can significantly impact investment returns over the years. For example, an ETF with an expense ratio of 0.05% compared to another with an expense ratio of 0.1% can save investors a lot of costs in the long term.
2. Liquidity and trading volume
An S&P 500 ETF’s liquidity and average trading volume are also important for Canadian investors to consider. Higher liquidity means it's easier to buy and sell the ETF without affecting its price, which is particularly important for active traders. Canadian investors can assess an ETF’s liquidity by looking at its average daily volume.
3. Trading costs
When trading ETFs in Canada, in addition to considering the expense ratio, it is also important to pay attention to trading costs, such as brokerage commissions. Different brokers have different standards for brokerage commissions. Some brokers may charge a fixed fee for each ETF transaction, while others may charge a percentage based on the transaction amount.
4. Tax considerations
Taxation is a factor that cannot be ignored in the investment. While Canadian-listed ETFs are eligible for favorable tax treatments, U.S.-listed ETFs might have different tax considerations, such as withholding taxes on dividends.
5. Tracking error
Although the goal of an S&P 500 ETF is to closely track the S&P 500 Index, in reality, different ETFs may have certain tracking errors due to various factors (such as delays in component adjustments, cash holding ratio, etc.).
Top Canadian S&P 500 ETFs
Now, this section organizes several top Canadian S&P 500 ETFs, including VFV, VSP, ZSP, ZUE, XUS, and XSP. Each ETF offers unique features such as currency hedging options and varying management fees, allowing investors to tailor their investments based on their financial goals and risk preferences.
1. Vanguard S&P 500 Index ETF (VFV)
Objective: It seeks to track the performance of the S&P 500 Index by directly holding the underlying U.S. stocks.
Currency exposure: Unhedged, exposes investors to U.S. dollar currency fluctuations. When the Canadian dollar appreciates, the value of U.S. stocks converted into Canadian dollars decreases, and vice versa.
Management fees: The management expense ratio of it is about 0.09%, which is relatively low, making it attractive for cost-conscious investors.
2. Vanguard S&P 500 Index ETF (CAD-hedged) (VSP)
Objective: Similar to VFV but with currency hedging to mitigate the impact of exchange rate fluctuations.
Currency exposure: Hedged to Canadian dollars, reducing currency risk for Canadian investors.
Management fees: The management expense ratio of it is about 0.09%.
3. BMO S&P 500 Index ETF (ZSP)
Objective: It aims to replicate the performance of the S&P 500 Index through direct stock holdings.
Currency exposure: Unhedged, providing direct exposure to U.S. market performance and currency.
Management fees: Management fees are low, making it attractive to long-term investors seeking low-cost investments.
4. BMO S&P 500 Index ETF (CAD-hedged) (ZUE)
Objective: It offers similar S&P 500 exposure as ZSP but with currency hedging for Canadian investors.
Currency exposure: Hedged to Canadian dollars, minimizing currency risk.
Management fees: Management fees are low, appealing for long-term Canadian investors.
5. iShares Core S&P 500 Index ETF (XUS)
Objective: It tracks the performance of the S&P 500 Index by holding U.S. equities directly.
Currency exposure: Unhedged, allowing for potential currency gains or losses.
Management fees: Management fees are low, highlighting cost efficiency for investors.
6. iShares Core S&P 500 Index ETF (CAD-hedged) (XSP)
Objective: Similar to XUS but includes a hedging strategy to protect against exchange rate volatility.
Currency exposure: Hedged to Canadian dollars, providing stability against currency movements.
Management fees: Management fees are low, appealing for long-term Canadian investors.
How to find Canadian S&P 500 ETFs on moomoo?
Below is a step-by-step guide to teach you how to find Canadian S&P 500 ETFs on moomoo.
Step 1. Open the moomoo Canada app and click on Markets.
Step 2. Next, choose CA and go to the ETF section. Then, select S&P 500 under the Index ETF category to see the Canadian ETFs available on moomoo.
Step 3. On the detailed list page, you have the option to sort the ETFs by different criteria, including price changes, trading volume, transaction value, and market capitalization. Furthermore, you can use the VS function at the top to compare different ETFs.
