US Equities
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Contents |
Introduction
US equities are generally purchased by Canadians to provide portfolio diversification. International equities and emerging markets markets are considered in separate sections.
US equities are often benchmarked against the Standard and Poors 500 (S&P 500) Index,[1] which comprises 500 of the largest stocks by market capitalization that trade on US stock exchanges.
Mutual Funds and ETFs
Many actively managed Canadian mutual funds are available that allow Canadians to purchase US equities. Passively managed index funds or ETFs are also available. The Canadian arm of BlackRock, Inc. offers the iShares S&P 500 Index Fund (CAD-Hedged), TSX symbol XSP, which is a currency-hedged version of the US ETF IVV, which covers the S&P 500. A more recent entrant to the Canadian market, in late 2011, is Vanguard Canada and the Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged), TSX symbol VUS, which is a currency hedged version of the US ETF VTI, which covers the entire US market.
US stock exchanges offer ETFs that cover not only the S&P 500 Index but a wide variety of subindexes, investment styles, and sectors. Notable US ETFs include SPY, which covers the S&P 500, and VTI, which covers the entire US market.
Canadian investors can access these US ETFs through their discount brokers, but face currency costs unless the ETFs are held in a US-dollar account.
Currency Hedging
As mentioned above, it is possible for investors to purchase currency-hedged versions of some mutual funds and ETFs. The costs of currency hedging are a matter of some dispute. They have been estimated by advisor Dan Hallett, who recommends currency hedging for those investors who wish to have the currency protection, as 0.4 to 0.5%[2] A tracking-error comparison between the iShares S&P 500 Index Fund (CAD-Hedged) ETF XSP and the S&P500 is shown below.[3] This tracking error, which includes the total of the 0.24% MER, currency hedging costs, and any portfolio mismatching amounts to about 1% per year according to the BlackRocks's data:
- Note that prior to November 15, 2005, the investment objective of XSP was to replicate, to the extent possible, the performance of the S&P 500 Index. After November 15, 2005, the investment objective of XSP is to provide long-term capital growth by replicating, to the extent possible, the performance of the S&P 500 Hedged to Canadian Dollars.[4]
Another tracking error chart can be obtained from BigCharts,[5], and is shown below. This chart suggests an error of about 2% per year:
An up-to-date version of the BigCharts graph can be obtained in
this link. Although the two graphs disagree significantly in the size of the total tracking error, it is nevertheless clear that currency hedging will add significant costs above the 0.24% MER.
It should also be noted that investors who face significant US-dollar expenses - say, for "snowbirding" in the US - may not wish to hedge so that the currencies of their investments better match the currencies of their expenses.
US Stocks
US stocks can also be purchased directly by Canadian investors who wish to practice their own stock selection.
References
- ↑ Wikipedia, S&P 500, viewed March 12, 2009.
- ↑ Rob Carrick, The pluses - and minuses - of currency hedging, Globe and Mail, June 6, 2009. Viewed August 15, 2009.
- ↑ BlackRock Asset Management Canada Limited, Tracking Error Charting Tool, XSP, viewed January 16, 2012.
- ↑ XSP - iShares S&P 500 Index Fund (CAD-Hedged) Annual MRFP, viewed January 16, 2012
- ↑ BigCharts, plot of CA:XSP versus S&P500, viewed January 17, 2012
