The goodness of index investing is summed up to perfection in exchange-traded funds tracking the S&P 500.
S&P 500 ETFs are the investing product of the year – and, really, of the past 10 years as well. Minus a minuscule fee, these ETFs mirror the returns of the S&P 500. In other words, an index that produced otherworldly returns in 2024, and the past decade.
Go ahead – try and pick your own U.S. stocks. Just be honest with yourself in determining whether you can beat the S&P 500. Probably not.
The $20-billion Vanguard S&P 500 Index ETF (VFV-T) delivered a total return of 37.7 per cent for the 12 months to Nov. 30. VFV is unhedged, which means its returns reflect both S&P returns and the benefits of a falling Canadian dollar. For a look at returns that reflect the index and not currency moves, consider the $3.8-billion Vanguard S&P 500 Index ETF CAD-hedged (VSP-T) and its one-year return of 32.2 per cent.
Returns for both these ETFs are shown, as is the custom, on an after-fee basis. As reflected in the management expense ratio, the fee to own both these funds is a slim, trim 0.09 per cent. That’s nine cents per $100 invested.
No doubt, you’ve seen all the fawning this year over tech stocks like Nvidia (NVDA-Q) and Apple (AAPL-Q). They were a big story in stock market investing in 2024, and they’re top holdings in the S&P 500. The index is actually one-third weighted to tech, which is concerning. If tech corrects, then the S&P 500 is going to be hit hard.
Let’s get real about the S&P 500 – it looks peaky. After losing 19 per cent in 2022, it sprang back with sequential double-digit years that helped raise the annualized five- and 10-year total returns to 14 and 12 per cent, respectively. A realist’s take on normal average annual rate of return for stocks over the long term would be 6 to 8 per cent, including dividends. When an index gets ahead of those numbers, expect a reversion to more normal numbers at some point.
The S&P 500 did take a nasty fall in late December on news that interest rates may not fall as much as anticipated. But guessing its ups and downs is beyond the capability of almost every investor, pro or otherwise. Instead, simply divide the equity side of your portfolio between Canadian, U.S. and international stocks and let them run.
For U.S. exposure, 2024’s investment of the year remains a good choice.
