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ETF Investing for Beginners: U.S. Equity

July 15, 2011 - 0 comments

In the second blog post of this series, we will look at how an investor can use ETFs to obtain U.S. equity market returns. Canadians investing abroad must also be aware of how foreign exchange fluctuations can affect their portfolio returns. There are products available that attempt to hedge away this risk, such as the iShares S&P 500 ETF (CAD-Hedged) (XSP). This ETF could be used to replace a portion of another unhedged ETF in your portfolio that tracks the S&P 500 Index, such as the Vanguard S&P 500 ETF (VOO). For more information on currency hedging, please read An introduction to currency and currency hedging, by Mackenzie Investments. 

To obtain broad U.S. equity market exposure, an investor could purchase a combination of the following:

  • 80% Vanguard 500 ETF (VOO) – this ETF tracks the S&P 500 Index, which is widely regarded as the best measure of the large cap U.S. equities market.
  • 20% Vanguard Extended Market ETF (VXF) – this ETF tracks the S&P Completion Index, and offers broad exposure to mid, small, and micro cap U.S. companies. 

The allocations above would approximate the S&P Total Market Index (which offers exposure to over 3,500 large, mid, small, and micro cap companies).  Alternatively, Vanguard Total Stock Market ETF (VTI), which tracks the MSCI US Broad Market Index, could be purchased, with an MER of 0.07%.

Depending on the investor’s appetite for risk, an allocation could be made to the iShares S&P SmallCap 600 ETF (IJR). This ETF tracks the S&P SmallCap 600 Index, which covers approximately 3% of the U.S. equity market. This would increase the portfolio’s risk as well as expected return. 

Alternatively, the original allocation to VXF (which is comprised of mid, small, and micro cap U.S. companies) could be increased.

Once again, depending on the investor’s risk tolerance, a heavier allocation to value stocks could be considered (the definition of “value stock” varies among investors, but it is generally accepted that a high relative book to market ratio for a stock is a strong indicator). Similar to smaller capitalization stocks, adding more value stocks to the portfolio will increase the portfolio’s risk as well as the expected return. In the example to the left, iShares S&P 500 Value ETF (IVE) has been added to the mix, which tracks the S&P 500 Value Index.


Source(s):  BlackRock Canada, Standard & Poor’s, Vanguard

 

 

By: Justin Bender with 0 comments.
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