When I was pursuing my Ph.D. in Economics, I had the privilege of reading “The Little Book of Common Sense Investing” by John C. Bogle. This book was a revelation, especially since Index ETFs were not yet mainstream in Canada at the time. This experience partly inspired my books “Stop Hesitating, Invest” (in English) and “J’Arrête d’Hésiter, J’Investis” (in French), where I delve into the merits of Index ETFs.
Today, I’m happy to see young investors worldwide embracing these funds, with many portfolio managers and financial advisors even recommending them to their clients.
Among these, ETFs tracking the S&P 500 stand out for good reasons: since 2010, U.S. equities have delivered an impressive annualized compounded return of 14.63%, significantly outpacing Canadian equities at 8.43%. However, prudent investors know that past performance is not a guarantee of future results, and diversification is key to managing risk.
This article presents a straightforward strategy for navigating the populated market of Index ETFs. More specifically, it addresses the following fundamental questions:
- Is investing solely in the U.S. market sufficient to build a resilient, diversified portfolio?
- How can one balance the appeal of U.S. equities with the potential benefits offered by diversification?
- Which Index ETFs should one therefore select?
Disclaimer: While I try to ensure the accuracy of the information contained on this blog, I do not guarantee it. I’m not a licensed financial adviser or anything similar, so take this blog only as an educational resource and my personal thoughts and opinions. No liability is assumed for losses or disappointments due to the information provided. It is important that you always exercise your own judgement when making decisions that can impact your wallet, and your life!
I. What Are Exchange Traded Funds (ETFs)?
Exchange Traded Funds (ETFs) are investment vehicles traded on stock exchanges, much like stocks. Most ETFs are index funds, designed to mimic the performance of a specific index like the S&P 500 or NASDAQ. However, there’s a variety of specialized ETFs, from sector-specific to asset allocation and high-interest savings ETFs. For more details, I recommend reading my recent blog post Exchange Traded Fund (ETF).
II. Building a Resilient Portfolio Beyond the U.S. Market
The U.S. market represents over 50% of global market capitalization, making it an unavoidable part of any investment strategy. With annualized returns of 14.63% since 2010, it’s easy to see why so many investors are hooked. But here’s the plot twist: markets, like reality TV, can surprise you. The S&P 500 had a 17-year dry spell from 1965 to 1982—no growth, no profits, just a lot of nail-biting.
Lesson? Betting solely on the U.S. market is like putting all your chips on one roulette number. It’s exhilarating until it’s not.
III. How Should You Invest Your Money?
- Approximately 33% in domestic equities (e.g., Canadian stocks for Canadian investors).
- Around 67% in international equities, weighted by the size of each market.
IV. Choosing the Right S&P 500 ETF
If you’re thinking, “Okay, but I still want in on that U.S. action,” fair enough. S&P 500 ETFs are solid, but choosing one isn’t about chasing the hottest ticker symbol. Look for low fees, strong tracking accuracy, and a history of stable performance. And for goodness’ sake, don’t forget to sprinkle in other asset classes and markets to round out your portfolio.
With the guideline of a 33/67 split, even if you lean heavily into U.S. equities, they shouldn’t dominate your portfolio entirely. Here’s where choosing the right S&P 500 ETF becomes crucial. You might want to discuss this with your financial advisor to ensure your investments align with your risk tolerance and financial goals.
Conclusion
Investing isn’t about following trends blindly; it’s about applying common sense. Diversification across markets can protect your portfolio from the whims of a single economy. If you’re interested in diving deeper into the world of Index ETFs, pick up “Stop Hesitating, Invest” or “J’Arrête d’Hésiter, J’Investis“. Here’s to smart investing, and I’ll see you in 20 years!
