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So much of your success as a Canadian investor depends on how much exposure you have to the U.S. market.

The S&P 500 index delivered 16.6 per cent annually on a total return basis for the 10 years to Feb. 28, close to double the 8.5 per cent produced by the S&P/TSX Composite Index. The Canadian stock market has its moments, absolutely. But U.S. stocks do pack a punch.

For help in finding the right path for U.S. market exposure, consult the third instalment of the 2022 Globe and Mail ETF Buyer’s Guide. Ten TSX-listed exchange-traded funds are presented for the benefit of investors who would like to cover off their U.S. market exposure with one core fund.

Last year’s guide noted the exceptional returns from U.S. equity ETFs and cautioned investors to be mindful of downside potential in selecting funds. What we got from U.S. equity funds was another outstanding year, with 12-month returns for funds in the guide averaging 15.1 per cent.

There has been a change in the mood of the market, though. The “anything goes” atmosphere of 2021 has given way to a preference for stable, well-established stocks. You’ll see this in the revival of the low-volatility ETF listed in the guide after a period of underperformance.

This year’s guide also highlights an issue with comparing short-term ETF returns. Check out the three funds in the guide that track the S&P 500 – there’s a noticeable gap between their one-year returns. Daniel Straus, director of ETF research and strategy at National Bank Financial, says these discrepancies can be a result of differences in the calculations used to convert the U.S.-dollar S&P 500 return into Canadian currency. Mr. Straus pointed out that these differences tend to wash out in longer-term returns.

When comparing fund returns, it’s important to be aware of the impact of currency hedging. With hedging, your U.S. returns won’t be undermined when our dollar rises, nor will they be enhanced when the dollar falls. (Unhedged funds do better when our dollar is falling and lag when the dollar rises.) Some investment pros believe there’s no point in hedging if you have a long time horizon.

This year’s ETF Buyer’s Guide has so far covered Canadian equity and bond funds. Still to come: international and global equity funds, Canadian dividend funds and asset allocation funds.

Here’s a look at the technical terms used in the guide:

Assets: Shown to give you a sense of how interested other investors are in a fund.

Management expense ratio (MER): The main cost of owning an ETF on a continuing basis; 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. Most of the U.S. equity ETFs included here don’t do enough trading to generate much of a TER.

Number of holdings: Gives you an indication of whether a fund offers broad stock market coverage, or holds a more concentrated portfolio that may behave differently than benchmark indexes.

Sector weightings: Included to help you verify how well a U.S. equity ETF will diversify your Canadian holdings with exposure to sectors such as tech and health care.

Beta: Measures an ETF or stock’s tendency to move around in price compared with a benchmark index, in this case the S&P 500; a beta of less than 1.0 suggests an ETF is less volatile than the S&P 500, and greater than 1.0 indicates more volatility.

Launch date: The older an ETF is, the more likely it is that you can look back at a history of returns through good markets and bad.

Notes: Market data as of March 15, 2022. Returns to Feb. 28, 2022. Source: Rob Carrick;, TMX Money, ETF company websites

Click here to download an Excel version of the guide.

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