Investors around the world like to compare their investment returns against the most popular index, the S&P 500. In Canada, Vanguard offers investors both a currency-hedged and a currency-unhedged ETF to choose from to passively track the index.
Between 1957 and 2021, the S&P 500 Index offered investors a total compounded annual return of 11.88%.
I’ll compare which of the two Vanguard S&P 500 Index ETFs is best over the following categories:
- Fees
- Performance
- Yield
- Length of track record and fund size
- Risk
- Underlying holdings
I will outline VFV vs VSP below and compare which fund is a better option for most Canadians.
How Hedging Works
Since the S&P 500 Index contains US stocks, investors looking to gain exposure to it will have to face currency fluctuations between the US and Canadian dollars. Currency hedging offers Canadians the option to remove this effect, but keep in mind that the currency impact can be either positive or negative.
The VSP is the currency-hedged version of the VFV, meaning that either the negative or the positive impact of currency fluctuations is removed from the equation.
In the past, the US dollar generally strengthens against other currencies during periods of market volatility. This helps investors outside of the US by providing them with a positive currency return.
| ETF | VFV | VSP |
| Currency Hedged? | No | Yes |
VFV vs VSP: Fees
VFV and VSP from Vanguard are both cheap ETFs that track the S&P 500 Index in Canada.
VFV and VSP are offered at the same cost, both having a management fee of 0.08% and a management expense ratio of 0.09%.
Funds that are offered at a lower cost allow for your money to grow faster, especially over longer periods of time when this effect compounds.
Fees verdict – When considering fees, VFV and VSP are both identical in terms of costs, making it a tie.
VFV vs VSP: Performance
Performance is always key to look at when investing in a fund but keep in mind that an ETF may perform differently in the future. Past performance can help to show how a fund does during good and bad times.
Since both of Vanguard’s S&P 500 Index ETFs have the same inception dates, it is easy to compare performance between the two. The unhedged version of Vanguard’s S&P 500 Index ETF (VFV) has outperformed the hedged version over most of the important periods:
- 10-year return
- 5-year return
- 3-year return
- 1-year return
- Year-to-date return
Since the US dollar strengthens against most global currencies during rough markets, this also applies to a strengthening against the Canadian dollar. This helps to reduce the volatility of VFV relative to VSP during difficult markets.
Performance verdict – VFV, the unhedged version, is a clear winner in this category, having currently outperformed VSP over most key time frames.
VFV vs VSP: Yield
Although both ETFs track the S&P 500 Index, do they both pay an identical yield to investors?
Quarterly distributions are paid to investors by both the VFV and VSP ETFs.
The VSP ETF is currently paying a 12-month yield of 1.35% while VFV pays a 12-month yield of 1.26%.
The hedged version of Vanguard’s S&P 500 Index ETF actually pays a marginally higher yield to investors.
Yield verdict – In terms of yield, both VFV and VSP offer quarterly distributions, but VSP offers a marginally higher 12-month yield, making it the winner in this category.
VFV vs VSP: Length of Track Record and Fund Size
Fund size and the length of a fund’s performance track record are important factors to look at when choosing a pooled investment. Investors generally want to look for large funds with long performance track records.
Both VFV and VSP were launched on the same date, having an inception date of November 2, 2012.
With a track record that is longer than ten years, both VFV and VSP have a long performance track record.
When it comes to fund size, both VFV and VSP are very large ETFs, with over one billion dollars in assets under management. VSP currently has more than $2.5 billion in assets under management while VFV has over $6.5 billion in assets under management. VFV is a substantially larger ETF when it comes to assets.
The amount of assets a fund has can become a major problem when looking at very small funds (with only several million in assets under management). A fund must usually remain profitable in order for an asset management company to continue offering it. This is not applicable to either VSP or VFV.
Length of track record and fund size verdict – although both VSP and VFV have the same inception date, VFV is substantially larger when it comes to assets under management, crowning it the winner in this category.
VFV vs VSP: Risk
Riskiness is another key element to look at when considering funds. Generally, riskiness is assessed by looking at how volatile has been over time, both over short periods of time and longer periods of time. Risk is usually determined by the individual building blocks of a fund.
Both VFV and VSP are labelled as carrying a medium risk rating and are 100% equity funds that invest in US stocks that have large market capitalizations.
Since VFV is unhedged, it allows investors to benefit from an appreciating US dollar against the Canadian dollar. This helps to reduce risk to some extent, as the US dollar tends to increase in value against other currencies when broad markets are falling.
Risk verdict – when it comes to the riskiness of both ETFs, VFV and VSP both have a medium-risk rating assigned to them, but VFV is the winner here since the currency exposure to the US dollar generally helps to reduce volatility during difficult market environments.
VFV vs VSP: Underlying Holdings
VFV and VSP are both identical in terms of underlying holdings. The key difference between the two ETFs is that VSP uses derivative instruments to hedge away exposure to the US dollar.
Both the VFV and VSP ETFs currently have high allocations to the following sectors:
- Information technology
- Healthcare
- Consumer discretionary
- Financials
- Communication services
Currently, the top ten holdings of both VFV and VSP are:
- Apple Inc.
- Microsoft Corp.
- Alphabet Inc.
- Amazon.com Inc.
- Tesla Inc.
- Berkshire Hathaway Inc.
- UnitedHealth Group Inc.
- Johnson & Johnson
- NVIDIA Corp.
- Meta Platforms Inc.
Underlying holdings verdict – Since both VFV and VSP are identical in terms of underlying holdings, aside from the derivatives used to hedge currency exposure within VSP, there is no clear winner in the underlying holdings category, making it a draw.
Frequently Asked Questions
Is VFV Offered in CAD?
VFV is a Canadian-listed ETF, meaning that you can invest in US stocks (the S&P 500 Index) using Canadian dollars. You will be exposed to currency fluctuations between the Canadian and US dollar.
Why is VFV Dropping?
VFV, which tracks some of the largest US stocks by market capitalization, is highly sensitive to the overall market and economic conditions. When the VFV is dropping, it means that economic or market sentiment is poor, causing investors to withdraw their money from their stock investments.
The good news is that the US stock market has proven to be very resilient over the long term. US stocks as a whole tend to spend more time increasing rather than dropping in value. Investing is a long-term endeavour and investors should always expect to face short-term market volatility in order to earn investment returns.
Which is the better investment between VSP and VFV?
The decision between investing in VSP and VFV largely depends on your investment goals and perspective on currency risk. Both ETFs track the S&P 500 Index, but the primary difference lies in their approach to currency.
VSP is currency-hedged, meaning it aims to neutralize the impact of USD to CAD currency fluctuations. On the other hand, VFV is unhedged, which means it’s exposed to currency fluctuations.
Historically, VFV has outperformed VSP in certain periods, mainly due to the strength of the US dollar against the Canadian dollar. However, if you wish to mitigate currency volatility, VSP might be a more suitable choice. Assess your risk tolerance, investment horizon, and beliefs about future currency movements when making this decision.
Our Final Verdict
Although both VFV and VSP are almost identical ETFs (they both invest in the same stocks), there is a clear winner between the two S&P 500 Index-tracking ETFs.
Since exposure to the US dollar has historically helped to reduce losses (and has caused the VFV ETF to handily outperform its unhedged counterpart), VFV is the overall winner.
Despite VFV being a better choice overall, there are some particular situations in which to consider investing in one over the other.
You may want to invest in the VFV ETF if:
- You want to have exposure to fluctuations between the US and Canadian dollar
- You believe that the US dollar will increase in value relative to the Canadian dollar, which will help VFV to outperform VSP
You may want to invest in the VSP ETF if:
- You do not want to have exposure to fluctuations between the US and Canadian dollar
- You believe that the US dollar will decrease in value relative to the Canadian dollar, which will help VSP to outperform VFV
As an overall way to invest in US stocks, both VFV and VSP are top options to consider because they are offered at extremely low (and identical) management expense ratios.
If you are thinking of investing in the VFV, VSP, or any other ETFs, make sure to read my guide on how to buy ETFs in Canada to understand all of your available options.
