6 Best S&P 500 ETFs in Canada (2023): U.S. Index Fund Investing

Are you thinking of investing in the most robust stock market in the world, the U.S.?

If you don’t want the hassle of picking your own stocks, then a common way to invest in America is to buy an S&P 500 ETF.

The famed investor Warren Buffett has stated that after his death, he has instructed his estate to invest 90% of his vast fortune into a simple S&P 500 index.

We will cover the best S&P 500 ETFs in Canada below to help you make your buying decision.

Understanding S&P 500 ETFs

An S&P 500 ETF is an ETF that aims to track the performance of the S&P 500 index. It’s often considered a benchmark for the overall U.S. stock market and an indicator of the health of the U.S. economy.

Instead of picking individual stocks, when you buy shares of an S&P 500 ETF, you’re basically buying a small piece of all 500 companies in the index.

Here is the performance of the S&P 500, broken down by major market events. Between 1957 and 2021, this index earned investors an excellent average annualized return of 11.88%.

Pros and Cons of Investing in S&P 500 ETFs

Investing in S&P 500 ETFs is a popular choice among investors due to several advantages. However, like any investment, there are both pros and cons to consider. Let’s take a look at them:

The Best S&P 500 ETFs in Canada

ETF Name	MER	Annual Cost of $10,000 Investment
Vanguard VFV S&P 500 ETF	0.08%	$8
BMO ZSP S&P 500 ETF	0.09%	$9
iShares XUS Core S&P 500 ETF	0.10%	$10
Horizons HXS S&P 500 ETF	0.10%	$10
Invesco ESG S&P 500 ESG Index ETF	0.17%	$17
Invesco EQL S&P 500 Equal Weight ETF	0.26%	$26

1. Vanguard VFV S&P 500 ETF

Among the most inexpensive ETFs on our list is VFV, offered by Vanguard. The VFV offers investors exposure to the S&P 500 ETF, including any currency impacts from fluctuations between the US dollar and the Canadian dollar.

If you are looking to eliminate currency impacts, VSP is the currency-hedged version of VFV. Over a longer period of time, VFV has significantly outperformed VSP.

Both ETFs passively track the S&P 500 index, meaning your investment will be concentrated in US large-cap stocks.

Regarding fees, VFV and VSP are tied for the most inexpensive Canadian ETF tracking the S&P 500. Relative to most other ETFs and mutual funds, the MER of VFV is extremely low.

VFV has a long performance track record and is a massive ETF in terms of assets under management. These are great characteristics when deciding to invest in an ETF or fund.

The ETF offers a low yield, with distributions paid to investors on a quarterly basis. From a risk perspective, VFV is rated medium risk, which is in line with most equity investments.

With Vanguard being a very reputable name in the investment world and VFV being offered at the lowest MER, the ETF is a top choice to consider as an S&P500 ETF. 

I wrote a full Vanguard VFV review here and made a Youtube video about it here:

2. BMO ZSP S&P 500 ETF

Tied for the most inexpensive S&P 500 ETF in Canada is ZSP offered by BMO Global Asset Management. ZSP gives investors exposure to the underlying stocks in the S&P 500 and includes currency impacts between the Canadian dollar and the US dollar. 

If you are looking to eliminate currency impact on your investment return, ZUE is a similar ETF offered with a currency hedging overlay. Similar to the situation with Vanguard’s funds, ZSP has significantly outperformed ZUE over a long period of time.

BMO’s ETFs track the S&P 500 ETF, investing your money only in the largest publicly-traded US companies.

From a fee perspective, ZSP and ZUE are both tied with Vanguard’s ETFs as the most inexpensive S&P 500 available in Canada. This MER is much lower than the fees on most funds and ETFs available in Canada.

ZSP has a similar inception date to VFV (a long performance track record) and is even more massive in terms of assets under management. ZSP’s large size usually places it in the top three largest Canadian ETFs by assets. 

The ETF offers a marginally higher yield than VFV and pays distributions on a quarterly basis. ZSP is rated medium risk, which is fairly standard for an equity ETF.

While being almost identical in terms of features to Vanguard’s S&P 500 ETF offering, BMO is a great choice if you are looking to support a Canadian company (BMO) instead of a US one (Vanguard).

3. iShares XUS Core S&P 500 ETF

The next most inexpensive option as a Canadian S&P 500 ETF is XUS offered by Blackrock’s iShares. XUS invests your money in the S&P 500 index constituents while also including a currency impact from changes in the USD/CAD exchange rate.

XSP is the same ETF offered by iShares, adding a currency hedge to remove the impact of changes in exchange rates. Like in the previous examples, the currency unhedged version (XUS) has substantially outperformed its currency hedged counterpart (XSP)

Investing in the XUS or XSP will concentrate your money across large US companies.

XUS and XSP fall just behind BMO and Vanguard’s ETFs in terms of cost. iShares’ ETFs are marginally more expensive by one basis point (0.01%), which is insignificant in the long term.

XUS has a slightly shorter performance track record than the ETFs offered by Vanguard and BMO. In terms of assets, XUS is also relatively smaller. When compared to other Canadian funds and ETFs, XUS is still a massive ETF.

XUS offers a low yield (lower than the ETFs from BMO and Vanguard) and pays distributions on a more scattered basis (only semi-annually).

Although marginally less competitive than the ETFs from BMO and Vanguard, XUS is still a top choice for a Canadian S&P 500 ETF.

4. Horizons HXS S&P 500 ETF

Another large fund tracking the S&P 500 index in Canada is offered by Horizons. Horizons places a large focus on tax-efficient strategies, offering ETFs that do not pay regular distributions in order to reduce investors’ tax liability (especially in non-registered accounts).

HXS (unhedged) and HSH (hedged) are both ETFs tracking the S&P 500 ETF through a swap strategy. This means that instead of holding the underlying stocks in the index, Horizon purchases a swap on the total return of the S&P 500 index. This allows Horizons to avoid paying distributions.

The currency unhedged version of Horizons’ S&P 500 ETF (HXS) has outperformed its hedged counterpart (HSH) by a substantial amount over time.

Although not directly invested in large-cap US companies, the swap-based ETFs will offer an identical return and concentration.

Similar to iShares’ S&P 500 ETF offer, Horizons’ is more expensive than BMO’s and Vanguard’s by one basis point. Horizons’ ETFs also come with an additional swap fee.

HXS has a longer track record than its competitors but is also smaller in terms of assets under management. 

Both ETFs’ lack of yield comes with pros and cons for investors. Investors who value having some sort of yield from their investments will prefer other options on our list. Those looking for tax efficiency (especially in non-registered accounts) and that don’t care about yield will find Horizons’ ETFs invaluable.

With excellent features, Horizons’ S&P 500 ETFs will be very attractive for investors looking for tax efficiency from their ETFs.

5. Invesco ESG S&P 500 ESG Index ETF

Investors concerned with responsible investing (or ESG investing) will be thrilled to know that an S&P 500 ESG index exists. The S&P 500 ESG index is similar to the regular S&P 500 index, with minor differences based on ESG scores.

Invesco offers an unhedged version (ESG) and hedged version (ESG.F) of an ETF tracking the S&P 500 ESG index. The unhedged version will add the impact of currency fluctuations to your overall total return.

The unhedged version of Invesco’s S&P 500 ESG ETF has outperformed its hedged version since inception.

As a passive, inexpensive ETF, the level of ESG due diligence will likely be less thorough than for funds or ETFs that go beyond ESG scoring or that use active management.

When compared to peers on the list, Invesco’s ESG ETFs are significantly more expensive in terms of MERs. Relative to other Canadian mutual funds and ETFs, ESG and ESG.F are still very inexpensive.

Invesco’s S&P 500 ESG Index ETF comes with a very short performance track record and is much smaller in terms of assets. 

The ETF pays a low yield on a quarterly basis. It has an identical risk rating of medium, like the other S&P 500 funds on our list.

For investors that wish to have some level of ESG consideration across their investments, Invesco’s ESG ETF is a good choice to consider for S&P 500 exposure.

6. Invesco EQL S&P 500 Equal Weight ETF

Invesco offers an interesting twist on investing in the S&P 500 to Canadians – an equally balanced approach. The traditional S&P 500 index is capitalization-weighted, meaning that larger companies have a higher allocation than smaller companies.

EQL and EQL.F are the unhedged and hedged versions of Invesco’s equally balanced S&P 500 ETF. Within these ETFs, each of the 500 companies within the S&P 500 has an equal weight, leading to increased diversification and better balance. 

The unhedged version of the ETF will add the impact of currency fluctuations to your total return over time.

In terms of fees, EQL comes with the highest MER out of all of the S&P 500 ETFs on our list. When compared to broader equity mutual funds and ETFs in Canada, it is still fairly inexpensive.

Invesco’s EQL ETF comes with a short performance track record and is much smaller than most of the alternatives on our list. The ETF offers a slightly higher yield than its peers and pays distributions to investors on a quarterly basis.

The EQL ETF is rated medium risk.

One of the drawbacks of investing in an ETF tracking the regular S&P 500 index is that the largest companies in the US receive significant allocations in your portfolio. A balanced approach to investing could reduce concentration risk and help to avoid large drawdowns.

If you are concerned with having a well-diversified portfolio and don’t mind paying slightly more in fees, Invesco’s EQL ETF is a great choice to consider as a Canadian S&P 500 ETF.

Historical Performance of the S&P 500

The S&P 500 has undergone significant changes and seen a variety of market conditions from the 1980’s to 2021. Here is a summarized overview divided into decades, highlighting major events and trends.

1980s – Tech Boom Begins:

• Performance: The S&P 500 saw a surge, especially in the latter half, with an average annual return of about 17.5%.
• Key Events: Reaganomics, Black Monday of 1987 (largest single-day market crash), and the rise of technology companies.

1990s – Continued Tech Surge:

• Performance: The rise of the internet and tech companies fueled the market, seeing average annual returns of approximately 18.2%.
• Key Events: Dot-com bubble towards the end of the decade, dissolution of the Soviet Union, and the launch of the euro.

2000s – Dot-Com Bust and Financial Crisis:

• Performance: The early 2000s experienced a market downturn due to the dot-com bubble burst. The 2008 financial crisis further strained the markets. The S&P 500 had an average annual return of just 0.6% for the decade.
• Key Events: 9/11 attacks, Iraq War, and the housing bubble burst leading to the global financial crisis.

2010s – Bull Market Resurgence:

• Performance: One of the longest bull markets in history. Despite some volatility, the S&P 500 had an average annual return of about 13.6% for the decade.
• Key Events: Recovery from the financial crisis, tech giants’ dominance, U.S.-China trade wars, and the beginnings of Brexit.

Notable Years:

• 1987: Black Monday saw the S&P 500 drop by over 20% in a single day.
• 2008: The S&P 500 fell 37% over the year, one of its worst annual performances due to the financial crisis.
• 2013: The market soared, with the S&P 500 returning over 32% due to economic recovery and growth.
• 2020: A year of extremes; the S&P 500 dropped around 34% from February to March but ended the year up by over 16%.

Should you Invest in an S&P 500 ETF?

Whether or not you should invest in an S&P 500 ETF depends on several factors related to your individual circumstances. Let’s discuss the considerations you should keep in mind:

Factors to Consider Before Investing:

1. Risk Tolerance: While the S&P 500 ETF provides diversification, it is still subject to market risk. If the overall market declines, the ETF will likely decline as well.
2. Investment Horizon: Historically, the stock market has been a good place for long-term investments. If you have a short-term horizon, you might want to consider your investment choices carefully due to the potential for volatility.
3. Financial Goals: Ensure that investing in an S&P 500 ETF aligns with your financial goals, whether they be for retirement, buying a home, or other objectives.
4. Other Investments: Review your existing investment portfolio. If you’re already heavily invested in U.S. large-cap stocks, adding an S&P 500 ETF might not provide as much diversification.
5. Market Conditions: While it’s challenging to time the market, and it’s often not recommended, be aware of current market valuations and economic conditions when making investment decisions.
6. Tax Implications: Understand the tax implications of ETFs in Canada, including taxation of dividends and capital gains.

If you’re unsure about things like your risk tolerance, investment horizon, and financial goals, a great place to start is by doing this free investor questionnaire from Vanguard.

Should you Currency Hedge your S&P 500 Investment?

Investing in the S&P 500 index stocks through an ETF invests you in US companies. These companies have to be purchased in US dollars, exposing Canadian investors to an additional risk: currency fluctuations between the Canadian dollar and the US dollar.

Once you are invested in a US company, any appreciation in the US dollar against the Canadian dollar helps your investment returns down the road. This is because you are able to buy back more Canadian dollars once you sell your USD investment.

An unhedged investment means that currency fluctuations will impact your total return, while a hedged investment removes currencies from the equation. Hedging typically comes with additional costs but can reduce volatility.

The VSP and VFV ETFs offered by Vanguard both track the S&P 500 ETF, with the VSP being hedged to the Canadian dollar. The difference in performance between the two is due to currency fluctuations.

The currency unhedged version (VFV) has currently outperformed the VSP significantly since inception.

Using the S&P 500 as an Investment Benchmark

Investors today are frequently quoting the performance of the S&P 500 index as a proxy for excellent investment returns.

Comparing the performance of a fund or portfolio to that of the S&P 500 index is often not an apples-to-apples comparison. Remember that the S&P 500 index invests only in the largest US stocks, while a robust portfolio typically includes global stocks as well as other asset classes such as bonds.

The S&P 500 is a good benchmark to use if you are looking to assess the performance of an active portfolio manager versus the broad US market (for US active strategies).

For a lot of investor portfolios, investing only in an S&P 500 Index fund or ETF will not provide an appropriate level of diversification or risk management.

Impact of Foreign Withholding Tax

One factor often overlooked when investing in foreign stock ETFs is the impact of foreign withholding tax. This tax is levied on international investments and is particularly relevant for Canadian investors eyeing the S&P 500 index ETFs.

What is Foreign Withholding Tax?

Foreign withholding tax is a fee imposed by a foreign government on the income earned within its borders by foreign investors. In the context of S&P 500 ETFs, dividends generated by the underlying U.S. stocks can be subject to this tax before they reach Canadian investors.

The drag caused by the foreign withholding tax can reduce the after-tax return for Canadian investors.

How do S&P 500 ETFs Handle this Tax?

Different ETFs handle this tax in varied ways. Some ETFs, especially those domiciled in Canada that hold a U.S.-based ETF as their primary asset, might be subjected to this tax twice – once at the U.S. ETF level and again when distributions are made to Canadian unit holders.

However, ETFs that directly own the underlying stocks (rather than holding another ETF) can bypass double taxation.

Which S&P 500 ETFs are Most Affected?

While the impact of foreign withholding tax is a reality for almost all international investments, Canadian-domiciled ETFs that directly hold the underlying stocks, such as the Vanguard VFV S&P 500 ETF, can offer a more tax-efficient structure for investors in registered accounts. On the other hand, wrap or fund-of-fund structures can result in higher tax drags.

FAQs:

Are there any Canadian unhedged S&P 500 ETFs available?

Yes, there are Canadian unhedged S&P 500 ETFs available. An unhedged ETF allows Canadian investors to benefit not only from any potential growth in the S&P 500 but also from potential gains in the U.S. dollar against the Canadian dollar.

Examples include the iShares Core S&P 500 Index ETF (CAD-Hedged) (XSP) and the Vanguard S&P 500 Index ETF (VFV).

Can S&P 500 ETFs be purchased on the TSX?

Yes, S&P 500 ETFs can be purchased on the TSX (Toronto Stock Exchange). Many Canadian ETF providers offer versions of the S&P 500 ETF listed on the TSX, which makes it convenient for Canadian investors to gain exposure to the U.S. market without the need to open a U.S.-based brokerage account. All the ETFs mentioned above can be purchased on the TSX.

How do I buy an S&P 500 Index Fund in Canada?

An S&P 500 Index fund or ETF can be purchased in three main ways. These include:

• In a self-directed, discount brokerage account, such as Wealthsimple or Questrade.
• Through a robo-advisor such as Questwealth.
• With the help of an investment or financial advisor.

Conclusion

If you are looking to add US stocks to your portfolio, purchasing an S&P 500 ETF is one of the easiest and most robust ways to go about it.

While most of the S&P 500 ETFs available to Canadian investors are virtually identical, small differences remain between them.

If you are looking to invest outside of just large US stocks, make sure to consider other fantastic ETF options available to Canadians.