The Globe and Mail’s ETF Buyer’s Guide Part 2 – U.S. equity funds

Years back, a guide to buying U.S. equity ETFs could have been written on the back of a postcard.

You had a couple of S&P 500 ETFs, a Nasdaq fund and a few other options. Today, after a huge runup in U.S. stocks, there are more than 70 choices. In the second instalment of the updated Globe and Mail ETF Buyer's Guide, we focus on core U.S. equity funds with wide appeal to investors.

Wow, is there ever a lot to think about when looking at U.S. equity ETFs – the S&P 500 and its emphasis on large stocks, or total market ETFs that include small and medium companies as well; tried and true indexes or brand new ones; incredibly cheap plain vanilla funds (several have fallen in cost in the past year or so) or more expensive and exotic ones; and, finally, funds that use currency hedging and those that don't.

Hedging eliminates distortions to investment returns caused by fluctuations in the Canadian dollar against the U.S. buck, while also contributing to tracking error. That's where an ETF's returns wander off the ideal path of index returns minus fees. Hedging means your U.S. returns won't be undermined when our dollar rises, nor will they be enhanced when the dollar falls. If you forgo the hedge, you lose out when our dollar rises and benefit when it falls.

ETFs are a low-fee version of mutual funds that trade like a stock. Traditionally, ETFs tracked major stock and bond indexes; today, many funds follow more obscure indexes or have a manager who picks stocks. To invest in ETFs, you need a brokerage account. For help on that, consult my latest ranking of online brokers. For help in deciding what type of account to put your U.S. equity funds in, consult this ETF tax primer.

The updated Globe and Mail ETF Buyer's Guide will cover Canadian, U.S. and international equity, dividend funds and bond funds. The first instalment appeared Jan. 24. Look for further instalments in this space in the weeks to come.

Here is an explanation of some of the terms you'll find in the ETF Buyer's Guide:

Assets: Shown to give you a sense of how interested other investors are in a fund; the smallest funds may be candidates for delisting.

Management expense ratio (MER): The main cost of owning an ETF on an ongoing basis; as with virtually all funds, published returns are shown on an after-fee basis.

Trading expense ratio (TER): The cost of trading commissions racked up by the managers of an ETF as they shuffle the portfolio to keep it in line with a target index; add the TER to the MER for a fuller picture of a fund's cost. Note many ETFs do so little trading that their TERs round down to zero.

Dividend yield: Mainstream indexes can be a good source of dividend income; shown here are yields based on recent actual payouts.

Average daily trading volume: Trading of less than 10,000 shares a day on average tells you an ETF isn't generating much interest from investors; the less liquid an ETF is, the more potential there is for buyers to have to pay a premium to market price when buying.

A final note about hedging: ETFs that are hedged typically have the term "CAD hedged" in their name, with CAD being an investment industry short-form for the Canadian dollar.

Click here to download an excel version of the table.