The American stock market has a reputation for outperforming its Canadian counterpart in the long run, so it is natural if you might be looking for a way to get exposure to the performance of the US stock market.
Creating a portfolio of individual securities and managing it yourself to track the performance of the US stock market is an uphill climb for even the most experienced investors.
Fortunately, there are exchange-traded funds (ETFs) trading on the TSX that offer you a hands-off and low-risk method to invest in the US stock market.
If you want to diversify your portfolio by betting on the performance of the US stock market, my BMO ZSP ETF review might help you find the perfect investment to meet your needs.
Invest In The US Stock Market
Gain diversified exposure to the performance of the US stock market through an ETF that tracks the performance of the S&P 500 Index.
- Diversified exposure to the US stock market
- Low-risk asset class
- Low-cost and high liquidity
- Holds the constituent securities directly
- Does not invest in fixed-income securities
- Does not offer geographical diversification outside the US
What Is BMO ZSP ETF?
BMO ZSP ETF is a fund managed by BMO Global Asset Management, and it is designed to replicate, to the extent possible, the performance of the S&P 500 Index, net of expenses.
The fund invests in and directly holds the constituent securities of the underlying index in the same proportion as they are reflected in the index.
BMO ZSP ETF provides you with low-cost and low-risk exposure to the performance of the US stock market by tracking the benchmark index. The fund was launched on November 14, 2012, and it is one of the most significant ETFs in Canada, tracking the S&P 500 Index.
As of September 24, 2021, the total assets under management (AUM) for the fund stand at $9.899 billion.
It is a passively managed fund that only seeks to replicate the performance of the S&P 500 Index. You can use the fund to reflect the performance of the entire US stock market in the form of a single security in your portfolio.
What Does BMO ZSP Invest In?
Passively managed ETFs like BMO ZSP are designed to provide investors with diversified exposure to a basket of securities to align with different investing goals defined by the fund manager for each fund. Many ETFs hold a mixture of equity securities and fixed-income assets.
However, BMO ZSP ETF invests exclusively in equity securities held in the same proportion as in the S&P 500 Index. It means that by investing in BMO ZSP, you are effectively betting on the growth of the US stock market by replicating the benchmark index’s performance.
BMO ZSP ETF offers you diversified exposure to US stocks, but the fund does not offer geographical diversity or exposure to fixed-income assets. Your returns from investing in this fund rely entirely on the performance of the US equity security market.
A broad downturn in the US stock market could adversely impact your returns from the ETF.
This section of my BMO ZSP ETF review would have discussed the asset allocation split between fixed-income securities, like bonds and GICs, and equity securities for the fund. However, BMO ZSP ETF invests entirely in the US stock market to reflect the S&P 500 Index without exposure to fixed-income securities.
This section of my BMO ZSP ETF will discuss the top holdings for the fund.
BMO ZSP ETF focuses on investing in the entire US stock market, represented in the S&P 500 Index. It means that the fund invests in and holds the 509 securities in the underlying index and allocates its assets under management to individual securities based on the proportion reflected in the index.
As of September 24, 2021, its most significant holding is Apple Inc., with a 6.10% allocation. Its second-most significant holding is Microsoft Corp. accounting for 5.95% of its fund allocation, and Amazon.com Inc. is its third-most significant holding at 3.95%.
BMO ZSP MER And Fees
One of the best things about BMO ZSP ETF is that it is a passively managed fund. It means that the fund manager simply tracks the underlying index regardless of the performance of the individual securities held within the S&P 500 Index. The fund manager does not rebalance the portfolio to try and outperform the index.
The management fee for the fund is 0.08%, and the Management Expense Ratio (MER) does not exceed 0.09%. It is one of the lowest-cost ETFs you can find on the stock market, and it charges considerably lower fees than mutual fund products with similar benefits and features.
The typical fees for mutual fund products in Canada can be higher than 2%. ETFs like BMO ZSP offering a lower-cost solution for hands-off investors through its significantly lower MERs is one of the most important reasons why many Canadians increasingly prefer investing in ETFs than mutual funds now.
Since BMO ZSP tracks the performance of the S&P 500 Index without any attempts to outperform the index, it is no surprise that the fund’s performance has been almost identical to the underlying index.
Barring a decline caused by the pandemic-fueled sell-off frenzy between February and March 2020, the performance of BMO ZSP ETF has been prolific.
The ETF’s performance declined significantly in the weeks following the onset of COVID-19 and ensuing lockdowns. However, the underlying securities held within the fund recovered rapidly in the following months. The ETF is performing much better than before the slump, and it is well past its pre-pandemic highs.
BMO ZSP offers relatively lower capital risk than pure-play equity security funds that track specific sectors by diversifying across the US economy. The fund’s lack of exposure to fixed-income assets or securities trading in other markets entails a nominal degree of risk in the event of a major downturn.
However, the rapid recovery of the fund also shows that diversified exposure to the US stock market can provide you with significant long-term returns despite occasional bear market conditions.
BMO ZSP ETF was designed as a core holding that provides you with long-term wealth growth through capital gains by tracking the performance of the S&P 500 Index. It means that the fund does not offer much in terms of shareholder dividends.
Of course, it does not mean that your returns are limited to long-term capital gains. The fund distributes dividends to its investors every quarter with an annualized distribution yield of 1.16% as of September 17, 2021.
Currency hedging is a strategy employed by fund managers to offset any losses created by the price movement of the assets held by the fund. BMO ZSP ETF is not a hedged fund. However, the fund essentially comes with a twin fund called BMO ZUE that is hedged to the Canadian dollar.
BMO ZUE ETF also tracks the S&P 500 Index and has the same holdings as BMO ZSP. The only difference is that the performance of the fund is hedged to the Canadian dollar. It means that if the US dollar weakens against the Canadian dollar, it could affect the returns for BMO ZSP.
Investing in BMO ZUE would mitigate the adverse impact of a weakened US dollar in such a scenario. However, the US dollar tends to remain strong against the Canadian dollar, and it might be better to hold BMO ZSP instead of BMO ZUE in the long run.
This section of my BMO ZSP ETF review will discuss a few alternatives that you can compare the fund with to make a more informed decision about whether BMO ZSP might be a suitable investment for you.
Besides the currency-hedged version of the ETF, BMO ZUE, there are several other ETFs trading on the TSX that track the performance of the S&P 500 Index like BMO ZSP ETF, including:
ZSP Vs. VFV
Vanguard VFV ETF is another low-cost ETF designed to track the performance of the S&P 500 Index. The fund manager rebalances the fund’s constituent securities to reflect the proportion in which they are held by the underlying index, much like BMO ZSP ETF.
Like BMO ZSP, Vanguard VFV ETF holds the underlying securities directly, and it comes with a lower MER of 0.08% compared to BMO ZSP ETF’s 0.09%. Vanguard VFV could be a viable alternative to BMO ZSP if you want to gain exposure to the US equity market.
Check out my Vanguard VFV ETF review to find out more about this fund.
Vanguard VSP ETF is also a low-cost ETF designed to track the performance of the S&P500 Index. It is also a passively managed fund, much like BMO ZSP. The fund is effectively a twin of Vanguard VFV ETF, but with the difference of being hedged to the Canadian dollar.
Vanguard VSP comes at a similar cost to BMO ZSP, with an MER of 0.09%. However, its annualized distribution yield is lower at 1.04% than BMO ZSP ETF’s distribution yield of 1.16%.
If you want your investment to be hedged against the Canadian dollar and US dollar exchange rates, VSP might be a good alternative for you to consider.
ZSP Vs. XUS
BlackRock iShares XUS ETF is a fund designed to track the performance of the same underlying index as BMO ZSP ETF. However, iShares XUS differs from BMO ZSP ETF because one of its primary holdings is iShares IVV, the US version of the ETF tracking the S&P 500 Index.
iShares IVV accounts for 94.48% of its holdings, while the rest is divided across the equity securities held by the underlying index.
iShares XUS is also a passively managed fund that comes at a low cost. However, it charges you a slightly higher fee than BMO ZSP ETF. The fund’s management fee is 0.09%, with an MER capped at 0.10%. It also has a slightly lower annualized distribution yield of 1.03% than 1.16% for BMO ZSP ETF.
Check out my BlackRock iShares XUS ETF review to find out more about this fund.
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Our Final Verdict: Is BMO ZSP A Good Investment For You?
BMO ZSP ETF is one of the best ETFs available to Canadians who want to track the S&P 500 Index and gain exposure to the performance of the US stock market. It is a passively managed fund with a significant AUM.
Being passively managed means that the fund manager does not charge a high fee for managing the fund for you, allowing you to keep most of your investment returns from the ETF.
Unlike many of its peers tracking the same index, BMO ZSP ETF holds the constituent securities directly instead of a US-traded counterpart ETF. BMO ZSP is an affordable ETF, and it could be an excellent pick for you if you want a long-term buy-and-hold investment to track the US stock market.
Read this article: My list of the best S&P500 ETFs in Canada.
If you want to invest globally outside North America, check out my iShares XEF ETF review to learn about an ETF that invests your funds in 21 developed markets worldwide.