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When investors talk about the performance of the market, they’re usually talking about the S&P 500. The S&P 500 is a collection of the 500 largest public companies in the U.S, and has historically had strong returns. But as a Canadian, how can you take advantage of this and invest in the S&P 500?
Investing in the S&P 500 can by achieved by buying an index fund listed on the TSX (Toronto Stock Exchange). This allows you to quickly diversify and purchase the entire index (all 500 companies) at once.
There are some things to think about as you go through this process, so read on to get the full picture.
5 Steps to Invest in the S&P 500 in Canada
As a Canadian, investing in the S&P 500 can be done by performing the following 5 steps:
- Open a Trading Account
- This will enable you to purchase index funds. See below for setting this account up with a brokerage if you don’t already have one.
- Fund the Account
- This is typically done by a transfer from your existing bank. There may be a minimum amount, and the brokerage will let you know how much it is.
- Decide on an Index Fund
- Pick one of the index funds listed below that tracks the S&P 500.
- Purchase Share of the Index Fund
- Index funds are purchased just like shares. Decide how many shares you want to buy and place an order with your brokerage. This is typically done by choosing how much you want to invest, then dividing that number by the price of the index fund.
- Monitor
- Keep an eye on your investment and watch your money grow. There’s not much active involvement, but checking occasionally is wise.
And that’s it. As Canadians, investing in the S&P 500 is easy and accessible.
Why Index Funds?
Index funds are a great way to passively grow your wealth.
As noted above, getting invested in index funds is simple, and you can set it and forget it. Once you’ve purchased an index fund, the issuing company will automatically rebalance the portfolio, meaning there’s no need for active trading for you. So don’t need to worry about updating your portfolio as the S&P 500 evolves. You can just hold the index fund for the long term.
As well, index funds are considerably cheaper than other options like mutual funds, with typical rates being in the $8-$10 on $10,000 invested. This means that you keep more of your money, and your money will grow as the market grows. You’ll always get the average return of the index though, so if you’re looking to exceed it you’ll need to explore other investing strategies.
Finally, by buying the whole index, you’re essentially purchasing all the companies on that index. This allows you to quickly diversify across industries. You’re purchasing 500 strong companies that have cumulatively grown ~10% per year. Diversifying reduces your downside risk, as a single company’s decline will not have a big impact on your account.
Index fund investing is a great strategy for beginner investors.
Deciding on a Trading Account Brokerage
To purchase index funds, you’ll need to set up a self-directed brokerage account.
It’s important that you select a self-directed account, and not a mutual fund account. Self-directed accounts will allow you to purchase the index funds, and give you full control over what you hold in your account. Mutual fund accounts are typically limited to a handful of funds curated by that bank, which have much higher fees (1% to 1.5%) compared to index funds (0.08% to 0.10%).
In Canada, some popular options are Questrade and WealthSimple. I personally use Questrade, and have had a great experience with it over the last few years.
When choosing a brokerage, they all have different minimum deposits (to open the account), and trading fees. Once you’ve opened the account, the minimum deposit won’t matter, but if you’re just starting out, it may impact your decision. As for trading fees, if you’re purchasing index funds you are not going to be executing many transactions, so these are not of huge concern. That said, you should make sure you review the account details before choosing a brokerage.
When setting up a self-directed account, you can also consider taking advantage of registered accounts for tax-savings.
Potential S&P 500 Index Funds in Canada
When buying index funds, it’s important to make sure that they’re listed on the TSX (Toronto Stock Exchange), which is often denoted by a “.TO” suffix after the ticker (e.g. ZSP.TO). Purchasing funds listed on a U.S. stock exchange is also possible, but there may be tax implications to be aware of.
When considering index funds, you want to monitor the Management Expense Ratio (MER), which is the cost of the fund per dollar invested. You also want to see how closely it’s tracking it’s target index (the S&P 500). Here are a couple great options for Canadians:
- BMO S&P 500 Index ETF (TSX : ZSP)
- This index fund has an MER of 0.09% ($9 for every $10,000 invested), and has the largest market cap of the funds listed.
- It’s also got a 1.4% distribution yield (dividend) as of the writing of this article.
- iShares Core S&P 500 Index ETF (TSX : XUS)
- This index fund has an MER of 0.10% ($10 for every $10,000 invested).
- It’s also got a 1.26% distribution yield (dividend) as of the writing of this article.
- Vanguard S&P 500 Index ETF (TSX : VFV)
- This index funds has an MER of 0.08% ($8 for every $10,000 invested), and is issued by the company who created index funds.
- It’s also got a 1.24% distribution yield (dividend) as of the writing of this article.
The differences between the funds are minute, so you’re best to just pick one and get started. Investing for your future is always a great decision, and this is a great step on that journey.
Summary
Investing in the S&P 500 as Canadians is easy and accessible. By performing the 5 steps outlined in this article, you’re setting yourself up to build wealth, and increase you financial health.
Continue on your journey of wealth, learning the tools and mindsets you need to build the wealth you want.