The best way for Canadians to invest in the S&P 500

Two men arm wrestling

How can Canadians invest in the S&P 500?

The S&P 500 is a core holding for many investors. It’s an index comprising 500 of the largest companies in America, and has delivered excellent returns to long-term investors for over a hundred years.

By far the easiest and cheapest way to invest in the S&P 500 is through exchange-traded funds (ETFs).  Unlike mutual funds, ETFs can be traded throughout the day and are listed on stock exchanges, like the TSX. Most importantly, ETFs generally have lower fees than mutual funds – it’s not unusual to see fees of less than 0.10% per year, or about $1 for every $1,000 invested.

All you need to invest in ETFs is a brokerage account. If you’re just getting started, I always recommend Questrade – they don’t charge commissions for buying ETFs!

There’s three ways Canadians can invest in the S&P 500 using ETFs:

  1. Purchase an ETF tracking the S&P 500 in American dollars on the NYSE
  2. Purchase an ETF tracking the S&P 500 in Canadian dollars on the TSX

Between these two options, there’s several good ETFs to choose from and a variety of factors to consider.

The best S&P 500 ETF on the NYSE

There’s three major ETFs tracking the S&P 500 on the NYSE. Here’s a summary of all three:

SPY

IVV

  • Market cap: $185 billion USD
  • MER: 0.04%
  • Fact sheet

 VOO

  • Market cap: $115 billion USD
  • MER: 0.03%
  • Fact sheet

Between these three, SPY is a clear loser due to its higher management fee. There are some nuanced differences between these funds, for example SPY is a UIT, but the simplistic view of lower fees being better holds based on past performance.

Between IVV and VOO, I’d recommend VOO due to the slightly lower management fee, but both are excellently priced and highly liquid, so we’re really splitting hairs here.

The best S&P 500 ETF on the TSX

There’s five major ETFs tracking the S&P 500 on the TSX. Here’s a summary of all five:

XSP (currency hedged)

VSP (currency hedged)

ZSP/ZSP.U (more on the ‘.U’ later)

HXS (synthetic, more on this later)

VFV

I’ll return to the idea of currency hedging and its consequences in a moment, but for now let’s compare apples to apples.

VSP has both a lower management fee and market cap than XSP. You’re likely to hold these ETFs for years, if not decades, so lower fees trump a small increase in liquidity. I’ll give this one to VSP.

It’s the same situation with VFV and ZSP, where I have to give the win to VFV.

However, it’s worth noting that ZSP has an important advantage in that it trades on the TSX in both USD and CAD. To buy the USD version you’d buy ZSP.U, and to buy the CAD version you’d buy ZSP. For more on this, check out my article on Norbert’s Gambit.

But what is currency hedging? The problem with investing in the S&P 500 with Canadians dollars is that you’re buying companies that both trade and operate in American dollars. If the American dollar weakens relative to the Canadian dollar, your investment is worth fewer Canadian dollars. Conversely, if the American dollar strengthens relative to the Canadian dollar, your investment is worth more Canadian dollars. This is called currency risk.

Let’s look at a chart comparing VSP (currency hedged) and VFV (unhedged) over the last 6 months, with dividends reinvested.

  Compartive chart of VSP (currency hedged) and VFV (unhedged) over the last 6 months with dividends reinvested   We can see that the currency hedged ETF significantly outperformed the unhedged ETF. This is because the American dollar weakened relative to the Canadian dollar over the summer, from a high of $1.36 CAD in May to a low of $1.21 CAD in September.

But this doesn’t mean that VSP is better. The American dollar could easily have strengthened during that time period. And what if the exchange rate stayed the same? In that case VFV would have done better because the MER is lower and money wouldn’t have been wasted hedging against currency fluctuations. Remember that hedging costs money (albeit it’s relatively inexpensive to hedge USD/CAD for institutional players).

Because of currency fluctuations, there’s no clearly superior ETF. However, we can say that VSP is a safer investment for Canadians. Think of it this way: a bet on VFV is a bet that the S&P 500 will go up and that the US dollar won’t weaken, whereas a bet on VSP is just a bet that the S&P 500 will go up. For risk adverse investors, VSP is probably the better bet, but ultimately the decision depends on the long-term performance of the American dollar.

HXS: the odd one out

You may have noticed that I haven’t discussed HXS yet, the fifth Canadian S&P 500 ETF.  This one is unique, as it’s a synthetic ETF.  HXS does not actually own any of the stocks in the S&P 500, but it is provided with the returns of the index by a third party (in this case a major Canadian bank).

The consequence of this arrangement is that HXS does not pay dividends, instead they are built into the share price of the ETF. There is also an additional 0.30% ‘swap fee.’ This ETF structure can have serious tax benefits, as capital gains can be taxed at a more favourable rate than dividends, depending on your marginal tax rate. Capital gains taxes can also be delayed for years by simply not selling your investment, whereas dividends are always taxed the year you receive them.

Avoid HXS in a registered account, because there are no tax advantages and you will still have to pay the 0.30% swap fee.

The bottom line here is that HXS is a complicated product, and you may want to talk to your accountant before investing.

Withholding taxes

Here’s something else to consider: if you’re willing to buy VFV and expose yourself to currency fluctuations, why not just buy the S&P 500 in American dollars using VOO? After all, VOO has a MER of 0.03% compared to VFV’s MER of 0.08%.

Furthermore, if we pop the hood on VFV we can see that its only holding is VOO – the American listed ETF!

If you have access to American dollars without paying significant exchange fees (for example by using Norbert’s gambit), then this argument is sound, at least before considering taxes.

American listed ETFs are subject to a 15% withholding tax on dividends that may or not apply, and may or not be refundable when you file your taxes, depending on the account you’re trading in. This becomes even more complicated when a Canadian listed ETF owns an American listed ETF.

Here’s a flow chart to help you figure out whether the dividend withholding tax applies. Further reading can be found herehere and here.

 withholding tax flowchart

The most important things to conclude from this chart are the following:

  • If you own a Canadian ETF with American ETFs or stocks in it in any registered account, you will always pay the 15% dividend withholding tax and it is not refundable

  • There are tax advantages for owning US listed ETFs rather than Canadian listed ETFs in an RRSP, RRIF, LIRA, LIF or LRIF

You may also be wondering whether the 15% withholding tax is significant. The answer is yes, at least compared to the MER of these ETFs.

VOO currently yields 1.74%. To find the cost of the 15% dividend withholding tax we apply the formula 15% x (yield – MER) = 15% x (1.74% – 0.04%) = 0.26%. This is the net yearly cost of the withholding tax. Compared to the 0.04% MER of the ETF, this is a big expense.

EQ Bank Savings Plus Account

The final breakdown

The takeaway here is that there’s no one size fits all answer to the problem. There are four great options to choose from, and you’ll need to consider your tolerance for currency risk and the type of account you’re trading in to determine which one is ideal for you.

Here’s a final flowchart to help you decide.

38 thoughts on “The best way for Canadians to invest in the S&P 500”

  1. If using Norbert’s gambit, would you suggest journalling over directly (e.g. VFV to IVV) or journal over a more stable fund (e.g. DLR. TO to DLR.U.TO), and then sell this to buy IVV?

    1. Hi Jackie,

      Unfortunately, most ETFs can’t be journaled between exchanges. Even though VFV and IVV have the same holdings they don’t have the same ticker, so it won’t work. There would need to be a VFV.U.TO or a VFV.US for it to work.

      Your safest bet is to use DLR.TO and DLR.U.TO. The only downside here is that you won’t be participating in the market for a couple days while you wait for the trades to settle.

      A second option is to journal over a cross-listed equity you already own, sell it for USD, then immediately buy back your position on the TSX. The major banks and other large Canadian companies like Bell and Enbridge are all cross-listed.

      Hope this helps!

  2. Great write-up. Thanks! In summary for those with a RESP account with no access to US dollars. Withholding tax would apply and it is ineligibile for foreign tax credit correct? What would be my best bet in this case?

    1. Correct – withholding taxes are lost in an RESP, and there’s no mechanism for getting them back with tax credits. This means the only savings you’d get from buying a US listed ETF would come from a very small difference in management fees, which probably wouldn’t be enough to make up for currency conversion fees. So your best bet is either VSP.TO (currency hedged) or VFV.TO (unhedged). There’s really no definitive answer here, but I wouldn’t lose sleep over it regardless of which ETF you chose.

  3. Thanks for the great info. I would like to buy one of these in my TFSA account with no access to US dollars. What should I pick?

    1. VFV.CA is the best unhedged option, VSP.CA is the best hedged option. If you have a long time horizon I’d go with the unhedged version!

  4. Sorry if I misunderstand : HXS seems to have far and away the largest combined fee if (MER + swap). So you’re implying that, in order for HXS to be the best choice in Cdn dollars, the tax savings would have to be greater than the fees. Is it that simple ?
    Thanks

    1. Hey RP,

      HXS has a management fee (MER) of 0.10%, and a swap fee of “no more than 0.30%.” So the total fees come out to a maximum of 0.40%.

      If you’re trading in an account where foreign withholding taxes aren’t recoverable, for example in a TFSA, then you’ll lose 15% of your dividends to the IRS. If the S&P500 is yielding 2%, that means you’re losing 0.30% to taxes.

      Investing in HXS allows you to avoid these taxes through their swap agreement. The question becomes whether the tax savings are big enough to justify the additional swap fee, and this will largely depend on the current yield of the index. In this example, you’re saving 0.30% in taxes and paying 0.30% for the swap fee, so you break even.

      Another benefit of HXS, I think I mentioned in the article, is that you can realize your capital gains strategically to lower your tax obligations in a margin or cash account. While you can do this with any other ETF as well, you will also have to claim the dividends as income each year, which may be disadvantageous depending on your situation.

      Hope this helps!

        1. Nope, the exact opposite! In a TFSA you’ll lose the withholding tax no matter what, so may as well buy a Canadian listed ETF. In an RRSP you will not pay a withholding tax if the ETF is US listed, bit you will it it’s Canadian listed.

  5. I don’t even know how I ended up here, but I thought this post was great. I do not know who you are but certainly you’re going to a famous blogger if you aren’t already 😉 Cheers!

  6. Great post! I own VFV in my TSFA and RESP, but would it then be wise to own VOO (using Norbert’s Gambit) for my non-reg account as the tax credits would offset the currency change?

    1. Thank you for the feedback!

      Generally it’s a good idea to take advantage of the tax savings in a non-registered account. The all-in cost of converting currencies with Norbert’s Gambit is very low, and afterwards you benefit from the tax savings year after year.

      What I’d recommend is buying ZSP.TO, which tracks the S&P500, and journaling it over to ZSP.U.TO, the USD-denominated version of the fund. You can then sell ZSP.U.TO and buy VOO with the proceeds. This way you can participate in the market while you wait for your brokerage to journal the shares.

  7. Shant Mardirossiaan

    Thanks for the article. How would you invest long term within your RRSP in Canada. Would VSP.CA be my best option?

    1. In an RRSP there’s tax benefits to owning American-listed versions of S&P500 ETFs, so I’d consider VOO or IVV instead of VSP.CA.

      In terms of investing long term, you’ll want to consider investing in domestic and international equities beyond just the S&P500, and whether you want to invest in bonds. If you’re looking to build a passive, diversified portfolio I recommend starting with Canadian Couch Potato, there’s a lot of great info there.

  8. Hey there, this was a really helpful article as well as your article on Norbert’s Gambit. I am currently in the process of moving around $100,000 in an RRSP account to and RRSP account with Questrade.
    Based on what your suggesting, considering I am wanting to purchase an ETF for a long term holding (30 yrs or so) and continue purchasing every two weeks going forward. I was strongly considering VOO for it’s low expense ratio until I came across your article. Would you recommend using Norbert’s Gambit in the method you describe to purchase VOO on an ongoing basis and I am simply delayed by a few days every time I need to purchase more shares bi-weekly, or do you think that the VFV.CA would be a better bet?

    1. Hey, thanks for the feedback!

      I’d make VOO your core holding for the tax benefits, but rather than going through Norbert’s Gambit every two weeks, I’d buy VFV.CA with new contributions. Then, whenever you’ve built up a significant investment in VFV.CA, convert it to VOO. You could do this once or twice a year and you’d get most of the tax benefits with almost none of the headache.

      Another benefit to this approach is that Norbert’s Gambit is more cost effective when you’re converting larger sums. Norbert’s Gambit won’t be cheap if you’re only converting a few hundred dollars at a time.

      If you’re investing for the long term, you’ll also want to consider investing in bonds and international equities beyond just the S&P500. There’s a lot of great resources out there for reading up on this, but I recommend starting with Canadian Couch Potato.

  9. great article thanks a lot. what do you think about XUU for investing Long term (20+ years) as apposed to vfv which is more expensive per share? thanks.

    1. XUU is a great choice for exposure to US equities, and it’s actually one of my core holdings. It’s very similar to an S&P500 ETF, like VFV, but it has exposure to small and medium cap American companies too. About 85% of XUU is comprised of the S&P500, the remainder is split between the small and med caps.

      The price per share shouldn’t deter you from an investment. The number of shares you own is basically irrelevant, what’s important is how much money you have invested and how much you continue to contribute over time.

      Hope this helps, thanks for your comment!

  10. Excellent Article, but a Possible Error?

    Great article, but I think you made a mistake in your two bullet conclusion.
    In your first bullet, I think you meant to say NON-Registered Accounts…(will ALWAYS pay withholding tax…)

    1. Hi and thanks for your thoughtful comment!

      Actually the original statement is correct – in a registered account, you will always pay the withholding taxes if the American securities are wrapped in a Canadian listed ETF. This is why investors should consider buying American-listed ETFs in an RRSP, so that this tax can be recovered.

  11. Your article is terrific! I’ve been thinking of buying either VFV or XAW in my RRSP and non-registered accounts. I thought XAW would give me better diversification across world markets vs just the USA with VFV. I would appreciate your comments and suggestions. Thanks!!
    PS.. Do you have a regular Blog we can subscribe to? (as you have a talent of explaining confusing financial topics very clearly).

    1. VFV and XAW are both great funds. Make sure you pick up some exposure to Canadian markets with an ETF like XIC or VCN too.

      In an RRSP there are tax advantages to owning US equity funds that are listed on American exchanges. Check out this article for more details – you’ll want to read up on the impact of US withholding taxes on ETFs.

      Thanks for your comment! As far as new blog posts I only get the chance to work on this site when I can find some free time, but you’re welcome to bookmark my ‘articles’ page to look for new posts.

  12. Great info. I see that reference has been made to both DLR.TO and journal over to DLR.U.TO as well as ZSP.TO and journal to ZSP.U.TO . Is there a difference between them? My ultimate goal is convert over 100K CAN to US with as little cost as possible. The 1.5% to 2% that Questrade is going to charge sounds a bit steep.

    1. To keep things simple I’d recommend sticking to the DLR/DLR.U pair. You should be able to bring your currency conversion fees down to less than 0.5% using this method, depending on how much currency you’re converting at a time.

  13. Is 4000 cad a good amount to convert to USD using Norberts gambit. Which of these ETFs are best for TFSA for buying in c onverted USD

    1. $4,000 is definitely enough to make it worthwhile!

      On Questrade you’ll pay $0 purchasing the ETF (use DLR.U.TO and DLR.TO), and $5 selling it. You’ll lose about $8 on the spread when you buy and sell, for a total cost of about $15. In comparison if you use the built-in currency conversion feature you’d pay about 2%, which is $80.

  14. Amazing article! I am in the process of converting funds out of RRSP mutual funds to an RRSP (long term investment 20+ years) Questrade account. I am Canadian and all funds in CAD. This will be my long term retirement fund where I will be contributing every 2 weeks. For less headaches and no currency exchange fees, would it be better to just hold a CAD listed S&P500 like VFV? I am looking at about 100K to start, and $1000+ per month contributions. As well, any recommendations for my TFSA? Thanks a lot! Also, can you email me!? grubesic45@gmail.com Thanks!

    1. It’s definitely easier to just stick with Canadian dollars, even though there are tax advantages to buying an S&P500 ETF in USD in an RRSP.

      This is especially true if you’re contributing just $1,000/mo – Norbert’s Gambit won’t save you much with that amount, and it’ll be a headache going through the process every few weeks.

      What I’d recommend is buying VFV in Canadian dollars, and then when you’ve built a significant position in that ETF (say $100,000), convert to USD and buy a US equivalent, like IVV or VOO.

      You already have $100,000 which I think is worthwhile converting to USD. With that amount you’d save about $300/yr in withholding taxes – whether that’s worth the trouble for you is a personal judgment call.

  15. I stumbled on this site while searching for “best S&P 500 index etf” for Canadians. Man, ain’t I impressed. Thank you for your great advice. I’ll come back often from now on.

  16. Hey PFC,

    Thank you very much for the info. I’m new to this and looking to invest in sp500. Currently have 15k in an mutual fund RSP and a high interest TFSA with 30k. I’m young so im looking long term with this. Would it be best opening an investment account with my bank or go with questrade? Also what route should I take to maximize tax benefits?

    Thanks in advance!!

    1. So “Tax Free Savings Account” is a bit of misnomer – it doesn’t have to be a savings account! If you’re young and in it for the long haul, definitely consider transferring your $30k TFSA into a portfolio of equities and bonds. You can open a TFSA with Questrade or your bank, I like Questrade though because of the free ETF purchases. For tax efficiency it’s best to own US listed securities in an RSP as opposed to a TFSA, but the savings are quite minimal (15% of dividends) so I wouldn’t stress too much about it at this point.

  17. Hi, I hope all is well. I make under $50,000 per year, so haven’t contributed to an RRSP at this point. However, I would like to start adding US stocks and/or US ETFs to my portfolio in the most tax efficient way possible. Would it be worth saving up (say $10,000 or more) and then doing Norbert’s Gambit to buy US stocks and/or ETFs in an RRSP given my current income? Or would it make more sense to buy them in a non-registered account? Or should I just stick with the Canadian ETF that holds US stocks/ETFs? Thanks for your help!

    1. Definitely prioritize maxing out your RRSP and TFSA first if you’re saving for retirement! No sense going into a non-reg account if you have room in those two. As far as being tax efficient goes, it’s better to own US-listed stocks and ETFs in an RRSP, but the savings are quite minor and I wouldn’t stress about it if your portfolio is still on the small side. Don’t forget you can get exposure to US equities through Canadian-listed ETFs – for example VFV.TO tracks the S&P500 in Canadian dollars. Hope this is helpful, cheers!

  18. Fantastic!

    Awesome article! Easy to read and understand. Like another poster, I would be a blog subscriber too, you definitley have a knack. I also appreciate that your audience is smart and thoughtful with their comments and that ity generates even more great content from you. I am now searching out more of your ‘material’ to catch up on! Keep it coming and Thank You!

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