Are you looking to invest in the S&P 500 Index but don’t know how to get started? Although you can’t invest in an index directly, low-cost ETFs that track indexes are available to Canadian investors.
Between 1957 and 2021, the S&P 500 Index has offered investors an annualized average return of 11.88%.
I will compare both ETFs to see which comes out on top across the following categories:
- Length of track record and fund size
I will outline ZSP vs VFV below and go over how the two ETFs stack up against each other.
How a Canadian ETF Tracking the S&P 500 Index Works
The S&P 500 Index contains US stocks, which require US dollars to purchase. Because of this, Canadians will have to take on the currency fluctuations between the US dollar and the Canadian dollar.
The impact of currency fluctuations can be either negative or positive, depending on whether the US dollar increases or decreases in value against the Canadian dollar. If you are holding a US investment and the US dollar increases in value against the Canadian dollar, you will have positive currency gains.
Both the ZSP and the VFV ETFs lack currency hedging. This means that investors accept the additional losses or gains from the appreciation or depreciation of the US dollar.
Dipping your toes into international investment waters like the S&P 500 brings to the forefront an essential factor: currency considerations. While the allure of US stocks is undeniable, the dynamics between the US dollar (USD) and the Canadian dollar (CAD) play a pivotal role in shaping your net returns.
The Currency Exchange Mechanics: At the outset, Canadians looking to invest in the S&P 500 will face the immediate task of currency exchange. When you convert your CAD to USD to make the investment, you’ll be at the mercy of the prevailing exchange rate. This rate isn’t static; it’s influenced by a myriad of factors ranging from economic policies to geopolitical events.
Impact of Fluctuations: Over time, as currencies naturally ebb and flow, the value of your US investment can be significantly affected. For instance, imagine a scenario where the USD strengthens against the CAD during your investment period. When it’s time to cash out and convert back to CAD, you’ll receive more Canadian dollars than you might have anticipated. Conversely, a weakening USD can shrink your returns when converted back to CAD.
Hedging as a Strategy: Some investors mitigate these currency risks by opting for ETFs that offer currency hedging. Hedging involves employing financial instruments to protect against potential losses from currency movements. However, with ZSP and VFV lacking this feature, investors need to be aware and potentially comfortable with the inherent currency risks.
ZSP vs VFV: Fees
VFV and ZSP are inexpensive ways to get investment exposure to the S&P 500 Index.
Both VFV and ZSP are priced the same, with both having a management fee of 0.08% and a management expense ratio of 0.09%.
Funds that have a lower management expense ratio allow you to grow and compound your wealth faster, especially over the long term.
Fees verdict – In terms of fees, both ZSP and VFV are identical in terms of costs, making it a tie.
ZSP vs VFV: Performance
When it comes to performance, ZSP and VFV should theoretically be identical, especially since both funds charge investors identical fees.
ZSP and VFV have very similar inception dates, which makes it a breeze to compare their performance over similar periods of time. Currently, each ETF has marginally better performance over different periods of time:
Although VFV has the highest ten-year compounded return, ZSP has the higher since-inception return.
Performance verdict – Although performance should be identical (in theory) between the two, ZSP outperforms across most time periods, including since inception, making it the winner here.
ZSP vs VFV: Yield
Since ZSP and VFV have identical investment mandates, they should in theory pay investors an identical yield.
Both exchange-traded funds offer quarterly distributions to investors.
The ZSP ETF is currently paying a yield of 1.33% while VFV pays a 12-month yield of 1.26%.
For some unknown reason, the ZSP ETF pays a marginally higher yield to investors.
Yield verdict – In terms of yield, although both ETFs should be paying an identical yield, ZSP comes out on top by paying a marginally higher yield.
ZSP vs VFV: Length of Track Record and Fund Size
Two important things to consider when investing in any time of fund are how large the fund is as well as how long the fund has been trading for. These are measured by assets and by how far out a fund’s inception date is.
ZSP and VFV were both launched around the same time. ZSP was launched on November 14, 2012, while VFV was launched on November 2, 2012.
Although the difference is very negligible, VFV does have a marginally longer performance track record.
When it comes to fund size, both ZSP and VFV are very large ETFs, with billions of dollars in assets under management.
ZSP is one of the largest ETFs in Canada, with over $9.2 billion in assets under management. VFV is also an enormous ETF, but only has just under $7 billion in assets under management. ZSP is much larger in terms of assets.
A fund’s size is important to consider when looking at newer and much smaller funds.
New funds that are launched which have only gathered several thousand dollars (or even a few million) are at risk of closing down early if they are unable to be profitable for the investment management company. This is not the case for either the ZSP ETF or the VFV ETF.
Length of track record and fund size verdict – with almost identical inception dates, ZSP comes out on top in this category by being a substantially larger ETF by assets under management.
ZSP vs VFV: Risk
A fund’s risk rating is very important to consider before investing, especially relative to your personal risk tolerance.
Investments with a higher risk tend to come with larger volatility but greater potential gains over longer periods of time. Canadian ETFs disclose their risk rating on their website or in their fund facts documents.
Both ZSP and VFV are outlined as having a medium risk rating. Both funds are 100% invested in US stocks with large market capitalizations.
Since both ETFs have identical investment mandates and no differentiating factors, this is a fairly uneventful category.
Risk verdict – In terms of riskiness, both ZSP and VFV offer identical mandates and come with the same risk rating, making it a tie in this category.
Frequently Asked Questions
Is ZSP better than VFV?
Since both ZSP and VFF are so identical in nature, it is extremely difficult to categorize one as being better than the other. Due to the marginally better since-inception performance from ZSP, investors could argue that it is a better ETF than VFV.
What is the Best S&P 500 ETF in Canada?
Since tracking the S&P 500 Index through a passive ETF is a fairly straightforward task, one of the best ways to determine the winner is to look at the lowest-fee option.
Surprisingly, the most inexpensive way to get access to a basket of roughly 500 of the largest US stocks (i.e. the S&P 500 Index) is through the TD US Equity Index ETF. TD’s ETF is offered at an MER of 0.07%.
Since TD’s TPU ETF does not reference S&P as an index (and instead uses a low-cost index provider like Solactive), it is able to offer an identical mandate at a lower cost.
Our Final Verdict
Since ZSP and VFV have identical mandates and near-identical features, the only way to crown a winner is to look at the slight differences that exist between the two. With a marginally higher since-inception performance, ZSP comes out on top as the winner of the two.
If you are looking to target a basket of the largest US stocks (the S&P 500 Index), both ZSP and VFV are excellent choices to consider. Both ETFs are offered at extremely inexpensive management expense ratios and have excellent overall features.
Before investing in the ZSP, VFV, or any other ETFs, be sure to take a look at my outline on how to buy ETFs in Canada to understand the different ways that you can do so.