The S&P 500 index is among the most popular equity indices globally. Since 1965, it has returned more than 10% annually, allowing long-term investors to generate game-changing wealth over time. However, during this period, investors had to wrestle with multiple market downturns due to black-swan events such as the financial crisis, the dot-com bubble, and even a global pandemic.
The S&P 500 index entered bear market territory in 2022 but is currently trading near record highs. It shows us that staying invested over longer time horizons is a much better option than timing the market.
While historical returns don’t guarantee future performance, the S&P 500 index is well-diversified and offers exposure to blue-chip giants such as Microsoft, Apple, Visa, Chevron, and Costco.
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Should you invest now or wait for a correction?
The S&P 500 index fell more than 4% in April but is still up over 7% year to date. Investors might be worried about headwinds such as inflation, elevated interest rates, geopolitical tensions, a sluggish macro economy, and rising consumer debt. But its also crucial to understand that exactly timing the market bottom is impossible.
Instead, it makes sense to view every major dip as a buying opportunity and benefit from outsized gains when market sentiment improves. For instance, even if you invested just before the markets crashed before the mortgage crisis in late 2007, you would have returned more than 350% since then.
One of the best investment strategies is dollar-cost averaging. In this strategy, you invest small sums of money every month to take advantage of market volatility, resulting in a favourable average share price over time.
If you have the time and expertise to research individual stocks and maintain a portfolio, you may derive superior returns compared to the S&P 500. Alternatively, more than 85% of large-cap mutual funds have failed to beat their benchmark, indicating that it’s quite difficult to achieve this goal.
Inversing in the flagship index offers broad and diversified exposure to profitable U.S. businesses. Even legendary stock market investor Warren Buffett famously said that the best investment for most people is a low-cost S&P 500 index fund.
The best S&P 500 index funds to own in 2024
BMO S&P 500 Index ETF (TSX: ZSP) is a low-cost TSX exchange-traded fund that tracks the S&P 500 index. The ZSP ETF has an expense ratio of 0.09%, which means you pay $9 in annual fees for every $10,000 invested in the fund. However, the ZSP ETF exposes you to foreign exchange risks, which might lower portfolio returns if the Canadian dollar appreciates in value against the U.S. dollar.
If you want to protect your portfolio from currency risks, consider investing in iShares S&P 500 Index ETF (CAD-Hedged) (TSX: XSP), which also has an expense ratio of 0.09%.
Now, the S&P 500 index also offers you a dividend yield of 1.1%. So, the dividends earned from investing in the ZSP and VSP would be subject to a 15% foreign withholding tax, which reduces the overall portfolio returns.
Here, investors with a Registered Retirement Savings Plan can opt to invest in a U.S.-listed S&P 500 ETF, such as Vanguard S&P 500 ETF, enabling them to circumvent the withholding tax on dividends.
