VFV vs VSP: Unhedged vs Hedged S&P 500 ETFs in Canada

ETF Jul 17, 2024 4 min read
VFV vs VSP: Unhedged vs Hedged S&P 500 ETFs in Canada

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The main difference between VFV and VSP is that VFV offers direct exposure to the performance of the S&P 500, while VSP offers investors a degree of protection from foreign exchange (FX) fluctuations in the Canadian dollar.

Essentially VSP is a CAD hedged version of VFV.

Both ETFs are denominated in CAD and are suitable for long-term investors who hold a bullish view on the American equity market.

The S&P 500 is a market capitalization-weighted index that is designed to mirror the returns of the 500 largest companies traded on stock exchanges in the US.

In essence, that means that the higher the market capitalization of a company, the greater its influence on the total return of the index.

As one of the most cited and closely monitored indices in the world, the S&P 500 offers a good proxy for the performance of the overall US equity market.

For that reason, the index is also the most commonly-used benchmark for stocks, ETFs, and other assets.

Particularly for investors seeking a ‘buy and hold’ strategy, both ETFs are a sound strategy for long-term wealth building.

VFV

Launched in 2012, the Vanguard S&P 500 Index ETF (VFV) tracks the performance of the broad US S&P 500 equity index.

Through the ETF, investors get indirect exposure to the growth and returns of the 500 most valuable companies in America.

As a long-term core holding, VFV allows investors to capture the US economy’s natural tendency to move upwards over time without the need for active participation, i.e., buying and selling at frequent intervals.

The VFV ETF is rated as medium risk given that it is entirely comprised of 100% equities, which are classified as ‘risk assets’.

However, the underlying equities in the S&P 500 are diversified by sector, region and customer base, thereby reducing the overall risk of any one company or sector on total returns.

For investors seeking an investment that leverages the potential of the American economy, VFV offers a solid option that has historically delivered strong capital gains with modest dividends (paid on a quarterly basis).

Since inception, VFV has delivered 17.16% annualized growth with a 5-year annual performance of 15.69% (as of June 30, 2024).

As at the same date, VFV had total assets of $14.21 billion.

VSP

Established in 2012, the Vanguard S&P 500 Index ETF CAD-hedged (VSP) is similar to VFV in that it also tracks the S&P 500.

However, as noted above, the ETF insulates investors from large fluctuations in the USD-CAD currency pair.

For this reason, the VSP could potentially be a suitable option for investors seeking a lower-risk investment while still wanting to capture the growth of the American economy (e.g., retirees).

If you are wondering why there is a variance between the two ETFs’ returns despite following the same benchmark and having similar MERs, the answer lies in the CAD-hedged component of the VSP ETF.

Over the last few years, the CAD has depreciated against the USD, so returns of the VSP ETF are slightly softer than the returns of VFV which has no currency hedging component.

Since its inception, VSP has delivered 13.22% annualized growth, including 13.40% in the last 5 and assets under management of $3.3 billion (as of June 30, 2024).

Performance: VFV vs. VSP

VFV Annualized Performance (as of June 30, 2024):

  • 3-Year: 13.34%
  • 5-Year: 15.69%
  • 10-Year: 15.29%
  • Since Inception: 17.16%

VSP Annualized Performance (as of June 30, 2024):

  • 3-Year: 8.64%
  • 5-Year: 13.40%
  • 10-Year: 11.46%
  • Since inception: 13.22%

 

Fees

VFV offers a Management Expense Ratio (MER) of 0.09% which is largely comprised of its 0.08% management fee.

VSP offers a Management Expense Ratio (MER) of 0.09% which is largely comprised of its 0.08% management fee.

Holdings

Below are the top security holdings within both VFV and VSP (top 10 holdings as a % of asset value)

  • Microsoft Corp. (7.22%)
  • NVIDIA Corp. (6.61%)
  • Apple Inc. (6.60%)
  • Amazon.com Inc. (3.85%)
  • Meta Platforms Inc. (2.40%)
  • Alphabet Inc. (2.33%)
  • Alphabet Inc. (1.95%)
  • Berkshire Hathaway Inc. (1.60%)
  • Eli Lilly & Co. (1.57%)
  • Broadcom Inc. (1.52%)

As of June 30, 2024


 

Below are the top holdings by sector within both VFV and VSP:

  • Information Technology (30.6%)
  • Financial Services (12.87%)
  • Health Care (11.99%)
  • Consumer Discretionary (9.86%)
  • Communication Services (9.28%)
  • Industrials (8.55%)
  • Consumer Staples (6.02%)
  • Energy (3.86%)
  • Utilities (2.48%)
  • Materials (2.32%)
  • Real Estate (2.18%)

As of May 31, 2024

Tax Treatment

Canadian investors are subject to a withholding tax of 15% under the Canada – U.S. Tax Treaty where ETFs incur a flat rate of 15% on all dividends earned from US businesses.

Given that both VFV and VSP are traded on the Toronto Stock Exchange, they will incur this 15% dividend rate regardless of what account they are held in (registered or non-registered).

The alternative that investors can pursue instead of buying VFV is to buy the VOO ETF within a registered account (RRSP, RRIF, etc.).

In this way, the withholding tax on dividends is avoided.

However, there are other considerations to be made and investors should conduct their own due diligence prior to investing in either ETF.

Hedging

The S&P 500 is comprised entirely of US stocks that are traded in the US dollar on their respective exchanges.

For this reason, there is an element of currency fluctuation for investors transacting in Canadian dollars.

Currency hedging offers a mechanism by which Canadian investors can mitigate the impacts of FX.

Essentially, currency-hedged ETFs will apply the use of derivatives (FX forwards) to lock in a specific exchange rate at a target date in the future.

If the USD has depreciated against the CAD in that period, the hedged ETF will net a gain on the contract.

If the USD has appreciated in the period (i.e., the CAD has lost value), the hedged ETF will net a loss.

This presents a key consideration to be made when selecting between VFV and VSP.

Between the two ETFs, only the VSP is CAD-hedged while the VFV is not.

As an investor, if you expect that the CAD will appreciate against the USD, it is better to buy VSP.

If your forecasts indicate that the CAD will depreciate against the USD, it is better to buy VFV.

Frequently Asked Questions

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Is VSP a good ETF?

The VSP is a good ETF, particularly for investors that hold the view that the CAD is going to appreciate against the US dollar (or that the USD will depreciate relative to other currencies). Historically, the ETF has provided strong capital gains returns and a modest dividend.

Is VSP hedged to CAD?

The VSP ETF is hedged against the movements of the US dollar against the Canadian dollar. In a hedged ETF, the issuer purchases underlying assets in their home currency (in this case, US dollars). To price the ETF in the currency of the market (Canadian dollars), a foreign exchange rate is applied and the manager will enter into a derivatives contract to mitigate FX rate volatility.

Contributors

Harshil Dhanky
AUTHOR

Harshil Dhanky

Harshil Dhanky is a financial services professional based out of Toronto, Ontario with extensive experience in the Canadian banking industry across Toronto, Calgary, and Vancouver in the capital markets, asset management, and lending sectors.

In the past, Harshil has worked with a range of consumer lending websites, personal finance advisors, investment managers, insurance companies, and other financial institutions to write and edit whitepapers, articles, blog posts, and other collateral read by consumer audiences to help them make better financial decisions.

His work spans a wide range of Canadian personal finance topics including savings and retirement programs, debt management tips, mortgages and personal loans, and other key financial issues for Canadian consumers at each stage of their life.

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