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The argument that exchange-traded funds are the simplest way to invest is never more tested than when you want exposure to U.S. stocks.

You have all the usual factors to consider when comparing U.S. equity ETFs – fees, diversification and trading volumes to name a few. But you've also got to look at whether a fund uses currency hedging, a factor with a huge influence on returns in recent years. U.S. stock indexes may also be less familiar to investors, and that puts more onus on them to dig into an ETF before buying to see how it meshes with other holdings.

The second instalment of the 2016 Globe and Mail ETF Buyer's Guide is designed to help investors make smart choices in the U.S. equity category. The previous instalment covered Canadian equity funds; coming up in the next two months are ETFs focusing on international stocks, bonds, and Canadian, U.S. and international dividend stocks.

Hedging has such an important influence on returns that it deserves a quick discussion before we get to the ETF data. Hedging eliminates distortions to investment returns caused by fluctuations in the Canadian dollar against the U.S. buck. 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.

Unhedged ETFs have done much better than hedged funds in recent years, but a run-up by the loonie in the first quarter of 2016 offers a reminder that hedged ETFs also have merit. Can't decide whether to go hedged or unhedged? Consider a 50-50 mix.

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. Many U.S. equity ETFs come in hedged and unhedged versions. Both versions are shown for the BMO S&P 500 Index ETF to highlight the differing returns. Afterward, just one version per fund is shown.

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.

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; 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 payouts.

Average daily trading volume: Trading of fewer 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.

Click here to download an excel version of the table.
 

Source: ETF company websites, globeinvestor.com

Click here to download an excel version of the table.

 

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