Seasoned stock investors mitigate market risks by diversifying. Instead of investing in one company, you buy shares of companies from different sectors. Some investors take a less cumbersome route and simplify the selection process by investing in exchange-traded funds (ETFs).
An S&P 500 ETF, in particular, allows Canadians to gain exposure to the larger equities market across the border. The S&P 500 is the benchmark index in the U.S. comprising 500 of the largest American companies. However, whether you’re investing in individual U.S. stocks or ETFs, hold them in a Registered Retirement Savings Plan (RRSP) to avoid paying the 15% foreign withholding tax.
Smart S&P 500 ETF to buy
Assuming you have $500 to invest, the Invesco S&P 500 Quality ETF (NYSEMKT:SPHQ) is now the best buy. This ETF, based on the S&P 500 Quality Index, invests 90% of its total assets (US$9.3 billion), at least, in common stocks. The index tracks the performance of stocks in the S&P 500 Index with the highest quality score and is rebalanced and reconstituted semi-annually (June and December).
Performance-wise, SPHQ is up 16.6% year to date compared to +12.4% for the S&P 500 Index and +5.3% for the S&P 500/TSX Composite Index. At US$62.84 per share, you can partake in the modest 1.2% dividend yield. The payout frequency is quarterly.
Quality stock holdings
The ETF is 100% American. Regarding sector breakdown, 30.8% of the fund is in information technology stocks. Canadian investors would have exposure to NVIDIA, Apple, Microsoft, or three of the Magnificent Seven or mega-cap stocks. Chipmaker NVIDIA has the most significant percentage weight, with 8.4%.
The healthcare sector (14.4%), led by Johnson & Johnson, is adequately represented, followed by the industrial sector (11.4%). Dow Jones components include Caterpillar and Honeywell. Mastercard and Visa are the top holdings in the financial sector (10.4%).
For energy (9.5%), you have Exxon Mobil, Chevron, as well as seven other industry heavyweights. Procter & Gamble and Alphabet lead the consumer staples (8.9%) and communications services sectors (7.4%), respectively. Consumer discretionary (3.9%), materials (2.7%), and utilities (0.6%) complete the 10 primary sectors. Only real estate has zero representation.
Medium risk
The Invesco S&P 500 Quality ETF is ideal for investors with medium-risk appetites and is relatively cheaper (0.15% operating expense annually) than other choices in the ETF space. Besides the diversified exposure, the fund’s investment style is growth. While the heaviest allocation is in the technology sector, there are no medium-sized companies.
ETFs trade like stocks, and you can buy and sell them during a trading day. However, Invesco S&P 500 Quality ETF was designed for long-term investors. The 16.6% year-to-date gain and trailing one-year price return of 30.6% indicate stability amid elevated market volatility and a high-interest rate environment.
Quality investment
Given the sector breakdown and stock holdings, Invesco S&P 500 Quality ETF is a quality investment. While the dividend yield is modest, the ETF boasts six consecutive years of dividend payments. Again, the dividend income is tax-free only when you hold the ETF in an RRSP.
