How to invest in the S&P 500 from Canada

Investing in the S&P 500, one of the world’s most renowned stock market indices has long been a popular choice for investors seeking exposure to the US equities market. However, if you are based in Canada, you might be wondering how to gain access to this investment and what is the best approach to invest in the S&P 500 from Canada.

In this comprehensive guide, we will provide you with a step-by-step process for buying the S&P 500 from Canada. We will cover important aspects such as choosing a suitable S&P 500 ETF, offering tips for selecting an ETF broker, and more!

How to buy the S&P 500 from Canada (Step-by-step guide)

1. Pick an ETF tracking the S&P 500

The S&P 500 measures the performance of 500 large-cap US companies. These companies span various sectors and are considered representative of the overall US equity market. As such, investing in the S&P 500 exposes you to a broad range of companies and can serve as a cornerstone of a diversified investment portfolio.

When it comes to investing in the S&P 500 from Canada, it will be costly and inefficient for individual investors to attempt to invest in each of these 500 companies separately. However, Exchange-Traded Funds (ETFs) offer a practical solution by providing a single investment vehicle representing the entire index’s performance. By investing in S&P 500 ETFs, Canadian investors can effectively participate in the potential growth of the index and enjoy the benefits of diversification.

The table below shows the five biggest S&P 500 ETFs available to Canadian investors. This list was already filtered using TMX Money, a site that can help you easily find and compare ETFs listed on the Toronto Stock Exchange (TSE).

5 Biggest S&P 500 ETFs in Canada

Don’t worry if you are not familiar with what the “Replication method” and “Use of income” mean; we’ll explain them later in this guide. Now, let’s move to the second step on how to buy the S&P 500 from Canada.

2. Choose a good ETF broker

After selecting an ETF, the next step is to identify a reliable broker to let you invest in it. To do this, we’ll briefly summarize what each broker offers on their platforms. 

Other important factors to consider when selecting an ETF broker are the fees, minimum deposit requirements, the range of available ETFs, and if they offer tax-free investment accounts. Here is a summary of these factors for each broker:

3. Place a “Buy Order”

Once you have chosen a suitable ETF broker and funded your account, you are ready to place a “Buy Order” for the S&P 500 ETF. For this example, we will use Interactive Brokers. However, you can follow these steps to execute your purchase with any broker:

a) Search for the desired S&P 500 ETF

Use the search function or browse through the available ETFs to find the specific S&P 500 ETF you have selected. Refer to the ticker symbol to locate the ETF accurately (in our case, we searched for ZSP).

You may come across instances where the broker offers multiple versions of the same ETF, denominated in different currencies such as USD, EUR, or CAD. It is advisable to select the ETF that aligns with your account currency. For example, as a Canadian investor with a CAD-denominated account, choosing a CAD ETF will help you avoid currency exchange fees.

b) Click on “Buy” or “Invest”

Usually, this tab is clear once you are on the ETF page, where you will find the chart and key information about the ETF.

c) Choose the order details

Now, you must choose the appropriate order type based on your preferences and trading strategy.

• Limit Order: It is set by default on IBKR. So you can set a specific price at which you are willing to buy the ETF. The trade will only be executed if the market price reaches or falls below your specified limit price.
• Market or Trader Order: This order executes the trade at the prevailing market price and provides immediate execution.
• Amount or Units: Specify the amount of money or the number of shares you wish to invest in the S&P 500 ETF.

d) Place the order

Finally, click “Submit But Order” to submit your order. At this point, the broker will process the transaction and attempt to execute the trade at the specified parameters.

What to look for in any ETF?

Not all ETFs are the same, and it’s important to consider several factors before deciding. Here are some factors to consider:

1. Fees (TER)

Different asset managers charge varying fees for their ETFs. For instance, providers like BlackRock (iShares) and Vanguard charge a small annual fee which is subtracted from the fund’s assets directly. As such, choosing an ETF with lower fees can result in higher returns on your investments. Ongoing charge (OCF) or total expense ratio (TER) are standard terms to describe this overall management fee.

2. Replication method

ETFs can employ two different replication methods:

• Physical replication, which involves purchasing the actual assets outlined in the index,
• Synthetic replication, where the fund manager utilizes financial derivatives to mirror index performance.

Additionally, you might encounter some ETFs that combine both approaches. Given the high liquidity of the S&P 500’s underlying companies, physical replication is often preferred due to its lower costs and reduced risks associated with derivatives.

3. Use of Income

ETFs also differ in how they handle income generated by the underlying companies.

• Accumulating ETFs reinvest dividends received from the companies included in the index, leading to a higher ETF price. You won’t need to pay transaction fees or trading costs for dividend reinvestment, as it is done automatically. 
• Distributing ETFs, on the other hand, provide regular dividend payments directly to your brokerage account, requiring you to declare the received dividends.

Ultimately, deciding between accumulating and distributing ETFs depends on your circumstances and investment strategy. Assess your long-term goals and income requirements to select the best option for your needs. For instance, if you plan to hold your investment for a relatively long period without the need for regular income, an accumulating ETF may be more suitable. However, if you aim to earn regular income from your investment, a distributing ETF would be a better choice. As for taxes, in Canada, distributions by ETFs are generally taxed in the year they are received, which means that holdings in an accumulation fund may still be subject to dividend tax. However, consulting with a tax advisor or professional for personalized advice on tax matters is advisable. Additionally, when you sell your holdings, you may be liable to pay capital gains taxes based on the type of account you have.

4. Size

Consider the overall fund size when selecting an ETF. Larger funds generally carry a lower risk of liquidation compared to smaller ones. In the event of liquidation, a fund sells its holdings, settles obligations, and distributes the remaining funds to investors.

5. Hedging

Some ETFs employ hedging strategies using financial derivatives to mitigate currency fluctuations. This comes at an additional cost but might protect you against large currency swings. Most of the ETFs mentioned earlier are “unhedged,” except XSP, as we believe that currency fluctuations tend to balance out over the long term.

Bottom Line

In conclusion, investing in the S&P 500 from Canada is a popular option for individuals seeking exposure to the US stock market. Here’s a summary of the steps to follow:

1. Pick an ETF tracking the S&P 500: Look for ETFs such as ZSP and VFV, which offer competitive management fees and are listed on multiple exchanges in different currencies. This allows you to bypass potential broker-related forex fees by purchasing in your local currency;
2. Find a suitable broker: Choosing a reliable ETF broker is crucial for investing in the S&P 500. Consider factors such as the number of available ETFs, fees, and the minimum deposit. Here’s a list of brokers that are giving free stocks, trades, and cash in Canada for your reference;
3. Open an account and deposit money: After deciding which trading platform to use, you must go through the account opening process and deposit money;
4. Send a buy order to your broker for the picked ETF: Sending a buy order to your broker is a straightforward and intuitive process. Just fill in the required fields to execute the trade!

We hope this guide has addressed your concerns and provided valuable insights. Remember to conduct thorough research to determine the best investment strategy for your needs.

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