An emerging question in long-term investing is, how much of a portfolio should go into U.S. stocks?
After a surge of almost 30 per cent for the S&P 500 Index over the past 12 months, many diversified portfolios will almost certainly be overweighted in the U.S. market. If you own U.S. stocks or equity funds, some portfolio rebalancing is probably in order. If you have little or no U.S. exposure, get it.
This third instalment of the 2024 Globe and Mail ETF Buyer’s Guide covers 10 funds you can use to cover off U.S. markets. Exactly how much U.S. exposure should you have?
Let’s look for answers in the blend of investments used for asset allocation ETFs, all-in-one diversified portfolios that will be covered in the sixth segment of this guide. Asset allocation ETFs with a balanced 60-40 mix of stocks and bonds typically have about 27 per cent of their total assets in U.S. stocks. The rest of the portfolio goes something like this: 15 to 18 per cent Canadian stocks, 12 per cent international stocks and 3 to 4 per cent emerging markets.
The case for investing in the U.S. market is that it’s much better diversified than the Canadian market, particularly in technology. The tech stocks known as the Magnificent Seven – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, largely drove the S&P 500 gains of the past year. The Canadian market has nothing like these companies.
The ETFs covered here typically track the S&P 500 or a similar index of larger companies. Nasdaq funds are not included because they are even more tech-focused than the S&P 500.
Be aware of the impact of currency hedging when comparing U.S. fund returns. With hedging, your U.S. returns won’t be undermined when Canada’s dollar rises, nor will they be enhanced when the dollar falls. Unhedged funds do better when our dollar is falling, and lag when it rises.
Some investment pros believe hedging is pointless for long-term investing because currency ups and downs will likely cancel each other out. As a result, this guide focuses on unhedged U.S. equity funds, while also listing the ticker symbol for the hedged version of a fund if it’s available.
This year’s ETF Buyer’s Guide has so far covered Canadian equity and bond funds. Still to come: international and global equity funds, Canadian dividend funds and, finally, asset allocation funds.
Here’s a look at the technical terms used in the guide:
Assets: Shown to give you a sense of how interested other investors are in a fund.
Management expense ratio (MER): The main annual cost of owning an ETF on a continuing basis; returns are shown on an after-fee basis.
Trading expense ratio (TER): The cost of trading commissions racked up by the managers of an ETF; add the TER to the MER for a fuller picture of a fund’s cost. Most of the U.S. equity ETFs included here don’t do enough trading to generate much of a TER.
Dividend yield: U.S. dividend yields tend to be lower than those in Canada, so don’t expect much in the way of income from most U.S. equity ETFs.
50-day trading volume: Average number of shares traded daily over the previous 50 days; it’s easier to buy and sell at competitive prices if an ETF is heavily traded.
Number of holdings: Gives you an indication of whether a fund offers broad stock market coverage, or holds a more concentrated portfolio that may behave differently than benchmark indexes.
Sector weightings: Included to help you verify how well a U.S. equity ETF will diversify your Canadian holdings with more exposure to sectors such as tech and health care.
Launch date: The older an ETF is, the more likely it is that you can look back at a history of returns through good markets and bad.
Download the source excel here.
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Rob Carrick