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Five low-cost ETFs to play the U.S. market

When it comes to investing, the Great White North has been getting badly outscored by the red, white and blue.

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Canada has a lot going for it: safe cities, pristine wilderness, universal health care. Plus, we're good at hockey, eh?

But when it comes to investing, the Great White North has been getting badly outscored by the red, white and blue. The U.S. S&P 500 index posted a scorching total return, including dividends, of 21.8 per cent in 2017 – more than double the S&P/TSX composite's total return of 9.1 per cent.

There are no guarantees that outperformance will continue, of course, but diversifying your portfolio with U.S. exchange-traded funds makes a lot of sense given all the great technology, health care, industrial and consumer companies that reside south of the border.

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Before I offer some specific ETF suggestions, a few general comments are in order.

First, I'm not a big fan of currency hedging. Not only does hedging add costs, but it doesn't always work as advertised. Moreover, holding unhedged U.S. dollar assets has diversification benefits; in times of uncertainty, investors often pile into U.S. Treasuries, pushing up the value of the U.S. dollar versus other currencies.

Second, I prefer to hold U.S. assets in my registered retirement savings plan. That's because, under the Canada-U.S. tax treaty, dividends from individual U.S. stocks or U.S.-listed exchange-traded funds are exempt from U.S. withholding tax if the shares are held in an RRSP or other registered retirement account. The 15-per-cent withholding tax does apply, however, to non-registered accounts, tax-free savings accounts and registered education savings plans.

One more thing to keep in mind: Canadian-listed ETFs that hold U.S. stocks are generally not exempt from withholding tax, regardless of the account type.

Got all that? If you are considering a U.S. investment, I strongly suggest you review the rules on U.S. withholding tax, which I covered in more detail here. PWL Capital also has an excellent paper on the subject available.

Here are five U.S.-listed ETFs that offer a nice combination of low costs and excellent diversification.

iShares Core Dividend Growth ETF (DGRO)

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Expense Ratio: .08 per cent

Holdings: 456

*Yield: 1.9 per cent

2017 total return: 22.8 per cent

I'm a dividend growth junkie, so it's only natural that I would hold DGRO both personally and in my model Yield Hog Dividend Growth Portfolio. You'll find all the usual dividend growth suspects in DGRO, including Johnson & Johnson, McDonald's, Procter & Gamble, Coca-Cola, Wal-Mart Stores, Home Depot, Apple and Microsoft – and hundreds of others. The 0.08-per-cent MER is a small price to pay for a diversified basket of great businesses that like to give their shareholders a raise every year.

iShares Core S&P U.S. Growth ETF (IUSG)

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Expense Ratio: 0.05 per cent

Holdings: 532

Yield: 1.2 per cent

2017 total return: 26.9 per cent

Want a little more hot sauce with your U.S. investments? IUSG has a nearly 40-per-cent weighting in technology stocks, including the FANG gang – Facebook, Apple, Netflix, and Google parent Alphabet. Tech has been a big driver of the U.S. market's returns, and if that momentum continues, IUSG will benefit. The flip side, of course, is that if the tech rally fizzles, IUSG will feel the pain. Focused on large-cap and mid-cap stocks with above-average earnings growth, IUSG also has double-digit exposure to the health care, consumer discretionary and industrials sectors, so it's more than a bet on tech.

Vanguard S&P 500 ETF (VOO)

Expense Ratio: .04 per cent

Holdings: 505

Yield: 1.7 per cent

2017 total return: 21.7 per cent

Nothing fancy here – just a low-cost ETF that holds the large-cap companies that make up the S&P 500 index. Want tech? The top five holdings – Apple, Microsoft, Alphabet, Amazon and Facebook – account for more than 13 per cent of the fund. McDonald's? Yup. J&J? Yup. Visa, Mastercard, Disney … and on the list goes. Tip: If you're investing outside a retirement account, you may be better off buying the TSX-listed version of the fund, which trades in Canadian dollars under the ticker VFV. You'll pay withholding tax on your U.S. dividends, but you'll avoid the potentially hefty currency conversion costs you could face when buying VOO in U.S. dollars.

Vanguard Total Stock Market ETF (VTI)

Expense Ratio: 0.04 per cent

Holdings: 3,638

Yield: 1.6 per cent

2017 total return: 21.2 per cent

SPDR Portfolio Total Stock Market ETF (SPTM)

Expense Ratio: 0.03 per cent

Holdings: 2,813

Yield: 1.7 per cent

2017 total return: 21.1 per cent

Looking for even more diversification? VTI seeks to track the performance of the CRSP U.S. Total Market Index, which consists of several thousand large-cap, mid-cap, and small-cap U.S. stocks diversified across growth and value styles. Another worthy option is SPTM, which seeks to track the SSGA Total Stock Market Index. SPTM has fewer stocks, but a lower expense ratio, than VTI. But these are negligible differences: They're both super-cheap, extremely well-diversified ETFs, and their returns last year were virtually identical.

*Yield is calculated as trailing 12-month distributions divided by current share price.

Personal Finance columnist Rob Carrick encourages the use of robo-advisers to cut through the complexity of getting started investing in Exchange Traded Funds. The Globe and Mail
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