Are you looking to invest your money in the Canadian stock market? You may be feeling a bit overwhelmed by investing directly into company stocks. So, what is a better alternative if you are an investor with a low risk appetite?
Index funds are a popular asset class for passive investors who are not looking for high or immediate returns from their investments. Before we talk about Canada’s best index fund, let us first understand what an index fund is and how it is different from other investments.
The reality is that an index fund can be both a mutual fund and an ETF. Going by the Investopedia definition, “an index fund is a type of mutual fund or ETF that has a portfolio designed to track the performance of a particular market index – such as the Standard & Poor (S&P) 500 Index.”
What is meant by a market index?
This is a portfolio of investments that represents a segment of top-performing companies in the financial market. For example, the S&P 500 Index is a market index of 500 of the largest publicly traded companies in the United States. Similarly, the Dow Jones Industrial Average is the market index that tracks 30 of the largest public companies traded on the NASDAQ and the New York Stock Exchange.
In short, when you invest in an index fund, you have effectively purchased a mutual fund or ETF that is broadly tracking a market index such as the S&P 500.
Why are Index Funds better than other managed funds?
Noted, American investor Warren Buffet recommends index funds as an ideal “haven for savings for the later years of life.” Index funds are better than other funds for the following reasons:
- Lower expenses and professional fees
- Suited for a passive investment strategy
- Lower investment value – as you invest in a lower fund value instead of picking up individual company stocks included in the portfolio.
- Lower risk and better returns in the longer run.
Now that you know how an index fund works let us look at why you, as a Canadian investor, you can take a look at the Vanguard S&P 500 Index Fund (or VFV).
What is the Vanguard VFV ETF?
Among the popular ETFs in Canada, the VFV ETF has been offered to investors by Vanguard Canada since November 2012. Rated among its most successful funds, the Vanguard VFV ETF is valued at around $2.245 billion as of March 31st, 2021.
As the name suggests, this fund invests in the top 500 U.S companies in the S&P and tries to replicate the performance of one of the most popular indexes in the world.
Why should you invest in the Vanguard VFV ETF?
Here are a few benefits that you can consider before you invest in the VFV ETF:
Diverse industry portfolio
As you probably know, most Canada-based ETFs are centered around limited industry sectors like mining, real estate, and energy. The Vanguard VFV fund has a diverse mix of S&P 500 companies operating in various industry sectors, including IT (24%), Health Care (14%), Financial services (12%), and others.
Better performance since inception
As compared to other index funds benchmarking the S&P 500, VFV has provided better returns for its investors since its inception in 2012. Overall, the fund has fetched a 3-year annual return on investment of 15.44%, while its 1-year return is pegged at 42.59%.
Similarly, the Vanguard VFV has outperformed other index funds that track the S&P 500 – with benchmark returns of 16.87% and net asset value or NAV returns of 17.16%.
As compared to any actively-managed mutual fund, index funds like the Vanguard VFV have lower fees – as low as 0.08%. In the long run, these near-zero fees can help you save a lot of your hard-earned dollars.
On the flip side, the U.S version of this index fund has a still lower fee of 0.04%. Having said that, the Canadian version (or VFV) can be purchased without thinking of the costs involved in currency conversion.
Lower risk factor
As a long-time investor in Canada, it is natural for you to invest in Canadian companies. The Vanguard VFX index fund would be a good addition to your investment if you are looking to diversify your portfolio to include U.S stocks in your mix. This can reduce your investment risk factor on a long-term basis.
Advantage of S&P 500 Index
When it comes to passive investing, the S&P 500 index fund is among the best performing funds that have provided healthy returns for long-term investors. By tracking the S&P 500, these funds track stocks for all 500 companies included in the index.
If you are looking for long-term investments, S&P index funds work best as you need to invest your money – and let the funds earn money for you. Plus, you do not have to think about which stocks or sectors to invest in – as the index fund takes care of all that.
The Bullish takeaway
The Vanguard VFV ETF is a good investment for passive investors who are looking for a more diverse portfolio than what is offered by most Canadian ETFs. Apart from good long-term returns on your money, this Vanguard index fund includes 500 of the top-performing U.S companies from diverse industries.
With solid returns since its inception, we would strongly recommend you invest your dollars into this fund for a comfortable retirement. All the Best!