When it comes to investing in U.S. markets, the S&P 500 is often the go-to index for Canadian investors. Two popular ETFs for tracking this index are Vanguard S&P 500 Index ETF (VFV) and iShares Core S&P 500 Index ETF (XSP). While both ETFs give you exposure to the 500 largest U.S. companies, there are key differences that might influence your choice. Let’s break it down!
What Do VFV and XSP Offer?
VFV: Vanguard S&P 500 Index ETF
VFV tracks the U.S. S&P 500 index, offering exposure to 500 of the largest U.S. companies like Apple, Microsoft, and Amazon. It does not use currency hedging, meaning your returns are impacted by fluctuations in the USD/CAD exchange rate. If the U.S. dollar strengthens relative to the Canadian dollar, VFV investors benefit, but if the Canadian dollar strengthens, returns could decline. VFV’s low MER of 0.09% makes it a cost-effective choice for long-term investors. This ETF is ideal for those comfortable with currency risk and who believe the U.S. dollar will remain strong over time.
XSP: iShares Core S&P 500 Index ETF
XSP also tracks the S&P 500 but includes currency hedging, which aims to neutralize the impact of USD/CAD fluctuations. This results in steadier returns tied closely to the S&P 500’s performance, regardless of exchange rate changes. With a MER of 0.10%, XSP is a good choice for short-term investors or those seeking reduced currency risk.
Key Similarities and Differences
| Feature | VFV | XSP |
|---|---|---|
| Underlying Index | S&P 500 (Large-cap U.S. stocks) | S&P 500 (Large-cap U.S. stocks) |
| Currency Hedging | No | Yes |
| MER (Management Fee) | 0.09% (slightly lower) | 0.10% (slightly higher) |
| Impact of CAD/USD | Exposed to exchange rate changes | Minimized by hedging |
| Diversity | Broad exposure across sectors: technology, healthcare, finance, etc. | Same broad exposure across sectors |
Currency Hedging
The biggest difference is currency hedging.
VFV does not hedge against USD/CAD fluctuations. If the U.S. dollar strengthens against the Canadian dollar, your returns may increase, and vice versa.
XSP uses currency hedging to reduce this risk. Your returns are tied more closely to the performance of the S&P 500 itself, not the exchange rate.
Example:
Imagine the S&P 500 rises by 10% in a year. During the same period:
The U.S. dollar strengthens by 5% against the Canadian dollar.
VFV investors would see a total return of approximately 15% (10% from the S&P 500 + 5% from currency gains).
XSP investors, due to hedging, would see 10%, as currency changes are eliminated.
If the Canadian dollar strengthens by 5%,
VFV’s total return would drop to approximately 5% (10% from the S&P 500 – 5% currency loss).
XSP investors would still see 10%.
This illustrates how VFV’s returns are influenced by exchange rates, while XSP offers steadier performance tied purely to the index.
Performance Differences
Currency hedging can affect your returns. For example:
- In years when the Canadian dollar weakens relative to the U.S. dollar, VFV may outperform XSP because it benefits from the exchange rate.
- In years when the Canadian dollar strengthens, XSP may have an edge because it eliminates this currency risk.
Performance Comparison: VFV vs. XSP (Annualized Returns)
| Timeframe | VFV (Unhedged) | XSP (Hedged) |
|---|---|---|
| 1 Year | 35.23% | 23.40% |
| 3 Years | 13.32% | 7.36% |
| 5 Years | 16.51% | 12.77% |
| 10 Years | 15.13% | 11.54% |
The performance numbers clearly show that VFV (unhedged) has outperformed XSP (hedged) across all timeframes.
When to Choose VFV
You’re Comfortable With Currency Risk: VFV can benefit if the U.S. dollar strengthens over time. Historically, the USD has often been stronger than the CAD.
You Want Lower Costs: With a slightly lower MER, VFV saves a little on fees.
When to Choose XSP
You Want to Avoid Currency Fluctuations: If you don’t want your returns to be affected by exchange rate movements, XSP is the safer choice.
Shorter Time Horizon: If you’re investing for the short term, currency fluctuations can significantly impact returns. Currency hedging reduces this volatility.
What About Dividends?
Both VFV and XSP provide exposure to dividends from S&P 500 companies. However:
- Dividends paid by U.S. companies are subject to a 15% withholding tax for Canadian investors, even if you hold the ETFs in a TFSA.
- In an RRSP or RRIF, this withholding tax is typically waived under the Canada-U.S. tax treaty.
If dividends are a key part of your strategy, VFV may be slightly more efficient for RRSP investors since it holds U.S. stocks directly, avoiding an extra layer of fees.
Which One Should You Choose?
The choice between VFV and XSP depends on your investment goals, risk tolerance, and view on currency fluctuations:
- Long-Term Investors: VFV may be the better option if you’re willing to accept currency fluctuations, especially if you expect the U.S. dollar to remain strong.
- Short-Term or Conservative Investors: XSP is ideal if you want less exposure to currency risk.
Final Thoughts
Both VFV and XSP are excellent ETFs for gaining exposure to the S&P 500.
- Choose VFV for simplicity, lower costs, and long-term U.S. dollar exposure.
- Choose XSP for stability and reduced currency risk.
No matter which you choose, both ETFs offer a low-cost, diversified way to invest in some of the largest and most successful companies in the U.S.
Got any questions about these ETFs? Let me know in the comments below!