Investing, Stock Market

How to Invest in S&P 500 Index in Canada: 5 Simple Steps

The S&P 500 Index has proven to be one of the world’s solid index funds even in bearish trends. For Canadians, the index provides easy access to gain broader exposure to the US stock market.

However, knowing how to invest in the S&P 500 Index will help you maximize your returns and minimize costs.

As a beginner, you want to also avoid some of the common mistakes some novice investors make while investing in the S&P 500 Index.

This article provides a step-by-step guide on how to invest in the S&P 500 in Canada. You will also learn some practical tips on making the most of your investment.

How to Invest in S &P 500 Index in Canada

Overview of the S&P 500 Index 

Before investing in the S&P 500 index, it’s essential to understand what it entails. But if you are already knowledgeable about the index, you can jump to the investing guide.

By definition, the S&P 500 Index refers to the pool of top publicly-traded companies in the US. These companies have large market capitalization and they constitute about 70% of the US stock market.

Based on the profiles of the underlying companies of the index, the S&P 500 Index is seen as one of the most solid and reliable index funds in the world.

Depending on your investment strategy, you can invest in the S&P 500 Index through a mutual fund or a one-ticket fund.

But how do you do it? That’s the subject of this article. Keep reading to learn about the investment process and the factors to consider before investing in the index.

Which Companies Constitute the S&P 500 Index?

Although the name of the index suggests 500 companies, the S&P 500 Index fund constitutes more than 500+ US companies. They include:

  • Apple Inc
  • Microsoft Corp
  • Amazon.com Inc
  • Alphabet Inc
  • Tesla Inc
  • Berkshire Hathaway Inc
  • Exxon Mobil Corp
  • Johnson & Johnson
  • UnitedHealth Group Inc

The majority of the companies under the index have large market capitalization. However, other small-mid cap companies that meet the index criteria are also included in the S&P 500 Index.

Although the index considers market capitalization as the top requirement for inclusion, a company must also meet other requirements before being considered. Some of these requirements are highlighted below:

  • Be a US company
  • Publicly trade a minimum of 50% of outstanding shares

Be highly liquid

  • Report positive earnings in the recent previous quarter

Due to the strict requirements, S&P 500 Index has positioned itself as one of the world’s best index funds in terms of volatility, diversification and performance.

Pros and Cons of the S&P 500 Index 

To make an informed investment decision, you should always weigh the pros and cons of a fund before committing your money. 

In this section, we’re going to look at the top pros and cons of the S&P 500 Index that are worthy of your consideration: 

Pros 

  • Diversification: Investing in the S&P 500 Index is the easiest way to gain greater diversification into the US stock market. This way, you will reduce your investment risk as the performance of a single stock will not ruin your portfolio.
  • Returns: Because the index comprises the largest companies in the US, it’s easier to provide investors with average returns. This has been the case for years and it will likely continue to provide decent returns in the future.
  • Saves time: The S&P 500 Index helps you save time researching and investing in the individual stock of the top companies in the US.
  • Inexpensive way of investing: You can invest in the largest US companies in the S&P 500 Index with a fraction of the amount it will take you to invest in the individual companies. 
  • Stability: With the majority of the companies under the index being highly volatile, it is easier for the S&P 500 Index to withstand volatility periods and recover quickly from bear markets, crashes or recessions. 

Cons

  • One-sided diversification: The S&P 500 Index comprises only US companies. This means that your entire investment could be affected when the US economy is in turmoil. 
  • Pre-built fund: If you’re looking to build a customized portfolio, you may find the S&P 500 Index unsuitable. This is because the index expects you to invest only in its underlying companies, some of which you may have no interest in investing in. This limits your exposure and control.
  • Average returns: Like other index funds, the S&P 500 Index doesn’t beat the market. This explains why it can’t provide high returns like individual stocks.

How to invest in the S&P 500 in Canada

Knowing how to invest in the S&P 500 Index in Canada is key to getting the most out of the index. 

With so much information out there, it’s easy to get confused about the ideal process of investing in the S&P 500 Index in Canada. But you don’t have to be confused.

This section presents a step-by-step guide on how you can invest in the S&P 500 in Canada within just 5 steps.

1. Choose a Fund Type

The S&P 500 Index can be invested through mutual funds or ETFs. However, mutual funds tend to be more costly than ETF index funds due to the high level of human management involved.

On the other hand, ETFs provide low-cost exposure in a single portfolio. As a result, you will save more on fees when you invest in an S&P 500 ETF. 

The following are some of the best S&P 500 ETFs in Canada that are traded on the Toronto Stock Exchange.

Key FactsVanguard S&P 500 Index ETF CAD Hedged (VSP) Vanguard S&P 500 Index ETF (VFV) BMO S&P 500 Index ETF (ZSP) iShares Core S&P 500 Index ETF (XSP)
Inception dateNovember 2, 2012November 2, 2012November 14, 2012May 24, 2001
Management fee0.08%0.08%0.08%0.09%
MER0.09%0.09%0.09%0.10%
Average return since inception+11.64%+15.9315.72%4.64
Distribution yield1.45%1.36%1.44%1.10%
Distribution frequencyQuarterlyQuarterlyQuarterlySemi-annual

From the above table, you can see that S&P 500 ETFs differ as per their management fees, management expense ratios (MERs), returns, yields, and distribution schedules.

This requires you to compare several factors when narrowing your selection of the fund to invest in.

2. Open a Trading Account

If you have sufficient investment skills to handle the investment yourself, the next step is to open a trading account with an online discount brokerage.

Since there are different online brokerages out there, your best bet is to sign-up with one of the top brokerages out there.

The following table highlights some of the best online discount brokerages in Canada with their key features.

FeatureQtrade QuestradeWealthsimple Trade
SecuritiesETFs, stocks, bonds, options, mutual funds, IPOs, GICs and secondary/treasury offeringsETFs, stocks, bonds, mutual funds, CFDs, IPOs, FX, precious metals, GICs and international equitiesETFs, stocks and cryptocurrencies
AccountsTaxable accounts, TFSA, RSP, RRIF, LIRA, LIF, and RESPTaxable, TFSA, RESP, RRSP, RIF, LIRA and LIF accountsTaxable accounts, TFSA and RRSP 
Minimum investment requirement  $1$1,000$1
Monthly, quarterly or annual fees$25 quarterly fees$0$0 / $10 monthly fees
FX feeNone1.45%1.5% 
Commissions on stocks and ETFs$6.95 or $8.75 on non-selected 100+ listed ETFs1 cent/share on selling ETFs and trading other securities None
IIROC regulationYesYesYes
CIPF coverageYesYesYes
Accessibility Web browser and mobile appWeb browser and mobile appWeb browser and mobile app  

With varying features, it’s essential to choose the discount brokerage that aligns with your needs. 

Above every other thing, consider the following factors when choosing a discount brokerage:

  • Number of supported securities: This will directly impact what you can invest with the brokerage. Choosing a broker that supports multiple securities will save you from opening multiple brokerage accounts when your investment needs change in the future.
  • Account types: The available accounts in a brokerage could also determine your investment costs. Investing through a registered account will save you more from taxes while investing through a USD account will help you save from FX fees.
  • Minimum investment requirement: A brokerage without a minimum investment requirement allows you to invest according to your budget without any pressure.  
  • Fees and commissions: The lower the fees and commissions on a brokerage, the lower your investment costs with it. 
  • Trading platform: Consider the available trading tools and resources that are necessary to simplify your investment.

However, it could be possible that you have no confidence in handling the entire process alone. 

In that case, you need to contact your financial advisor for direction. You can even ask your financial advisor to invest on your behalf. Of course, this will be more costly but it will save you some risks as well.

3. Fund Your Trading Account

Upon opening a trading account with your chosen brokerage, the next step is to fund it. As the above table shows, different brokerages have different minimum investment requirements.

If you signed up with a brokerage that requires a minimum investment (such as Questrade), it means that you must fund your account with the required amount before you can start investing.

But if you signed up with Wealthsimple Trade or another brokerage that doesn’t require a minimum investment balance, you can fund your account with as much as you want to trade.

That being said, different brokerages have different funding methods. It’s essential to factor in this when selecting your brokerage.

4. Search For Your Favorite S&P 500 Index Fund 

It’s now time to search for the S&P 500 Index fund you want to invest in, be it a mutual fund or ETF.

At this stage, all you need is to log in to your brokerage account and click on the search button. You should then enter the name or ticker of your favourite fund.

After that, you will be presented with your desired fund. Before proceeding, you should go through the Product Disclosure Statement (PDS) of the fund.

That way, you will understand the objective of the fund, its investment strategy, fees, performance and other key information relevant to you 

If the PDS sounds okay to you, you can proceed to place your order. Else, you should check out another related fund with a better profile.

5. Buy Your S&P 500 Index Fund

This is the final stage of the investing process. Upon searching for your favourite S&P 500 Index and consenting to the PDS, the next step is to purchase the fund.

All you need is to click on the fund from the search result to place an order. Among other things, you will be required to enter the number of shares or trading amount to place your order.

Once you complete the entire process, you will be required to review and place your order. It could take up to two business days for your order to settle, depending on your broker.

What to Know Before Investing in S&P 500 ETF in Canada

Knowing how to invest in the S&P 500 Index is not the end of the game. In fact, the game just started.

As a beginner, you can’t afford to repeat the common mistakes many beginner investors make while investing in the S&P 500 Index.

To avoid such mistakes, consider the following two factors before investing in the S&P 500 Index.

1. Self-Assessment

Before investing in any security, you must understand how it aligns with your investment objective and risk tolerance.

Based on that, you may find the S&P 500 Index unsuitable for your situation. This is essentially through if you’re:

  • Looking to take full control of your portfolio
  • Looking for higher investment returns without minding the risk level
  • Comfortable investing in individual stocks without regard to the cost and time requirement
  • Looking for global diversification beyond the US stock market

But if you’re looking for a low-cost diversification with average returns and low risk, you can’t go wrong with the S&P 500 Index

2. Currency 

If you’re going to invest in an S&P 500 ETF, it’s essential to understand the role of currency on your investment returns.

By investing through a Canadian-listed S&P 500 ETF, you will save on FX fees available on US-listed S&P 500 ETFs.

However, you may find US-listed S&P 500 ETFs more suitable because of their low fees if you’ve USD dollars and are willing to face the foreign withholding tax (charged in a non-RRSP account).

Also, you can reduce the impact of currency fluctuations on your CAD investment through a hedged S&P 500 ETF such as the iShares Core S&P 500 Index ETF (XSP).

The key takeaway here is that you should factor in the impact of currency movements before selecting an S&P 500 Index.

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Verdict

There’s arguably no low-cost way of gaining broader exposure to the largest companies other than through the S&P 500 Index.

However, it would be costly if you invest in the index the wrong way. Investing in the index through a costly platform could undermine the purpose of passive investment and limit your returns.

Hopefully, now you know how to invest in the S&P 500 Index in Canada. Not only that, but you can also avoid some of the common mistakes some beginner investors make when investing in the index.

If you have any questions or need further clarification, contact our expert team at [email protected] or draw my attention in the comment section.

And if you’re impacted by this guide, you should be generous enough to share it with your friends and colleagues. Go through our Investing Archive to expand your knowledge.

FAQs on How to Invest in S&P 500 in Canada

Can I buy S&P 500 ETF in Canada?

Sure! You can buy the S&P 500 ETF in Canada directly through some of the leading brokerages such as Wealthsimple Trade, Questrade and Qtrade. You can buy the ETF in CAD or USD.

Is there a Canadian version of S&P 500?

Yes. The S&P/TSX 60 Index serves as the Canadian version of the US S&P 500 Index.

The S&P/TSX 60 Index provides exposure to the top 60 Canadian companies with large market capitalization. This includes:  

  • Royal Bank of Canada
  • Bank of Montreal
  • Bank of Nova Scotia
  • Canadian Imperial Bank of Commerce
  • National Bank of Canada

Can you invest in the S&P 500 on Wealthsimple?

Sure! Wealthsimple Trade is one of the best discount brokerages to invest in the S&P 500 ETF in Canada. The interesting part is that Wealthsimple Trade doesn’t charge commissions when trading stocks or ETFs, including the S&P 500 ETF.

How much does it cost to buy S&P 500 stock?

It depends on the type of S&P 500 stock. If you’re investing through a mutual fund, then you should be ready to pay an average annual management expense ratio (MER) of 2%.

But with S&P 500 ETF, the investment cost can be as low as 0% depending on the brokerage you’re investing with.

Is it worth investing in S&P 500 now?

Given the uncertainty of the current global economy, you can’t go wrong with investing in the S&P 500 Index at the moment. The index has withstood several bearish trends and yet provided average returns to investors.

Is it better to buy S&P 500 or individual stocks?

If you’re looking for a low-cost and passive way of investing in the US stock market, the S&P 500 index is the way to go.

But if you have high-risk tolerance and are looking to outperform the market without minding the cost and time requirement, individual stocks could be more suitable for you.

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About John Adebisi

John Adebisi is a CPA, FCCA and MBA holder with a Bachelor's degree in Accounting & Finance. He has over a decade of experience in writing personal and business finance content for audiences across North America, Europe, the UK and Africa. In addition to his writing experience, he also has a strong background in financial research and analysis, giving him a unique perspective of the financial markets. John derives pleasure in helping people make smart financial decisions, and he believes that knowledge and experience can be valuable resources for anyone who wants to learn how to manage their money.

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