Top 3 S&P 500 Index Funds (2024)

Looking for an S&P 500 index fund? Here are my top 3 picks.

Did you know that over the last 15 years, a staggering 89% of all U.S. large-cap stock funds have not managed to outperform the S&P 500 Index?

This statistic is a powerful reminder of the challenge individual and professional investors face when trying to beat the market. Given these odds, a popular adage comes to mind: if you can’t beat them, join them.

For Canadian investors looking to align their portfolios with the broad market returns of the U.S. economy, investing in an is a great strategy. Here’s a look at the three S&P 500 ETFs that stand out as my top picks in Canada today.

The BMO option

My first pick among the S&P 500 ETFs available to Canadian investors is the BMO S&P 500 Index ETF (TSX:ZSP). This ETF is a popular choice, evidenced by its approximately $13.2 billion in assets under management, indicating that a significant number of investors have placed their trust in it.

ZSP is attractive for several reasons, not least its low expense ratio of 0.09%. This translates to just $9 in fees annually for a $10,000 investment, making it an economical choice for those looking to gain exposure to the S&P 500 without incurring high costs.

Additionally, ZSP can be easily bought and sold using Canadian dollars on most brokerage platforms, removing the need for currency conversion and simplifying the investment process for Canadians. This ease of access, combined with its cost efficiency and substantial market presence, makes ZSP a top contender for Canadians seeking to invest in the S&P 500.

My second pick addresses the concern of currency fluctuations that can impact returns for Canadian investors. While the previously mentioned ZSP is not currency hedged, meaning its performance can be affected by changes in the USD/CAD exchange rate, there’s an alternative for those wary of foreign exchange risk: iShares Core S&P 500 Index ETF (CAD-Hedged) (TSX:XSP).

XSP offers similar tracking to the S&P 500, mirroring its broad exposure to the U.S. equity market. However, it distinguishes itself by employing a currency hedging strategy.

This means that XSP is designed to mitigate the impact of currency fluctuations between the Canadian dollar and the U.S. dollar on your investment returns. For investors who prefer not to expose their S&P 500 investments to foreign exchange volatility, XSP presents an appealing choice.

Like ZSP, XSP also maintains a competitive expense ratio of 0.09%, ensuring that the cost of currency hedging doesn’t come at a high premium.

The Vanguard option

For those invested in ZSP or XSP, it’s important to note that as Canadian ETFs holding U.S. stocks, they are subject to a 15% foreign withholding tax on dividends. This tax can impact the overall return on your investment, especially if you’re focused on generating income from your portfolio.

However, there is a strategy to bypass this tax and potentially enhance your returns: investing in a U.S.-based ETF within a Registered Retirement Savings Plan (RRSP).

By doing so, you can take advantage of the tax treaty between Canada and the United States, which allows for the exemption from the 15% withholding tax on dividends paid by U.S. companies to Canadian investors, provided the investments are held in an RRSP.

One such option is the Vanguard S&P 500 ETF (NYSEMKT:VOO), a U.S. dollar-denominated ETF that tracks the S&P 500. Not only does VOO offer a way to avoid the withholding tax, but it also boasts a lower expense ratio of just 0.03%.

If you have access to a cheap method of converting CAD to USD, then investing in VOO within an RRSP could lead to significant savings on the foreign withholding tax on dividends, maximizing your investment’s potential growth.