Index funds are great investment options because they promise ownership of good types of stocks, immediate diversification and lower risk. All of that awesome goodness is enhanced by the unbelievably affordable price. These incredible features lead to many beginner investors choosing to invest index funds over individual stocks. Some of the very best index funds in Canada are based around the S&P 500 (Standard & Poor 500). This index includes the most important, globally diversified American companies across every industry, making it as low-risk as stock investing gets. However, you must remember, even the most stable of markets can fluctuate because of unforeseen events.

This index pretty much defines the market. When you buy a fund that is based on this index, you also get to reap the entire market’s returns. The S&P 500 is among the most popular indices in North America. In this post, we will discuss index funds in some detail. The process of investing in index funds is slightly different from buying stocks. We will talk about the important things and we will also list the five best index funds that you should consider adding to your portfolio.

Best Index Funds in Canada: All You Need to Know

What is an index fund?

The term “index fund” is used to describe a mutual fund or an exchange-traded fund (ETF) that is based on a specific preset basket of stocks, also known as an index. The index is usually created by fund managers or by investment banks and brokerage houses.

These fund managers then mimic the index, creating a fund that appears to be as similar to the index as possible, without any requirement to manage the fund actively. Over time the index changes, as companies are added and deleted, and the fund manager mechanically replicates those changes in the fund.

Because of this approach, index funds are considered to be a kind of passive investing, instead of active investing where a manager analyzes stocks and tries to choose from the very best available options. This passive approach means index funds tend to possess low expense ratios, keeping them cheap for investors who are just stepping into the market.

Some of the best-known indexes include the S&P 500, the Dow Jones Industrial Average and of course the Nasdaq 100. Index funds are a popular strategy for ETFs to use, and virtually all ETFs are based on indexes.

Why are index funds so popular?

Investors like index funds because they provide immediate diversification. With one purchase, investors can own a good swath of companies. For example, one share of an index fund which tracks the S&P 500 provides ownership in many companies. While some funds like S&P 500 index funds allow you to have companies across industries, others allow exposure to a selected industry, country or maybe investing style (dividend stocks for example).

The S&P 500 index fund is definitely one of the most popular index funds among investors. S&P 500 funds provide very solid returns over time, they’re diversified and they’re about as low risk as stock investing gets. Like all stocks, S&P 500 Index Funds also fluctuate, but over time the index has returned about 10 percent annually. That doesn’t mean index funds make money every year, but over long periods of time that’s been the average return and they are a safe mode of investment as long as you are thinking long term.

Let’s move on to the five best index funds available in Canada today. These funds are generally based on the S&P 500 or are made up of multiple stocks from that index. The list below includes S&P 500 index funds from a spread of companies, and it includes a number of the lowest-cost funds trading on the general public markets. When it comes to index funds like this, you should never forget to keep the annual cost in mind while calculating the total returns. 

Here Are the Best Index Funds in Canada 2020

Vanguard S&P 500 ETF (VOO)

As it’s quite evident from its name, this index fund tracks the S&P 500 index. As of December 2019, the fund holds $520 billion in assets. This has made it one of the most important funds available on the market. This ETF began trading in 2010, and it’s backed by Vanguard, one of the giants of the industry.

Expense ratio: 0.03 percent. This results in $3 annual cost for every $10,000 invested.

SPDR S&P 500 ETF Trust (SPY)

The SPDR S&P 500 ETF is the granddaddy of ETFs, having been founded all the way back in 1993. It helped begin the wave of ETF investing that has become so popular today. As of December 2019, it had $302 billion in assets, ranking it among the most widely known ETFs. The fund is sponsored by State Street Global Advisors, another heavyweight in the industry, and as the name states, it tracks the S&P 500.

Expense ratio: 0.09 percent. This results in a $9 annual cost for every $10,000 invested.

Fidelity ZERO Large Cap Index (FNILX)

The Fidelity ZERO Large Cap Index mutual fund is part of the investment company’s foray into mutual funds with no expense ratio, hence it carries the ZERO moniker. Technically, while this fund does follow the Fidelity U.S. Large Cap Index instead of the S&P 500, the difference in both the indices is only academic. The real difference is that Fidelity doesn’t need to cough up a license fee to use the S&P name, keeping costs lower for investors.

Expense ratio: 0 percent. That means that every $10,000 invested by you, won’t even cost a penny annually.

iShares Core S&P 500 ETF (IVV)

The iShares Core S&P 500 ETF is sponsored by one of the biggest fund companies in the world, BlackRock. With nearly $200 billion in assets (as of December 2019), this iShares fund is one of the most popular ETFs and like other large funds, it tracks the S&P 500. This index fund began in the year 2000, making it one of the best long-tenured players available.

Expense ratio: 0.04 percent. This results in an annual cost of $4 for every $10,000 invested..

Schwab S&P 500 Index Fund (SWPPX)

As of December 2019, the Schwab S&P 500 Index Fund holds $43 billion in assets. This makes it small compared to some heavyweights on this list. However, that shouldn’t matter much for investors. This open-end fund features a strong record dating back to 1997, and it’s sponsored by Charles Schwab, one of the most revered names within the industry. Schwab is particularly noted for its expertise in making investor-friendly products, as evidenced by this fund’s razor-thin expense ratio.

Expense ratio: 0.02 percent. That means every $10,000 invested would cost $2 annually.

Best Index Funds in Canada: Tips, Tricks and FAQs

Investing can become an extremely straightforward process once you understand that index funds are a sensible option for your portfolio.

What’s an index?

An index is nothing but a set of companies that represents some segment of the stock exchange or maybe the whole stock exchange. The Standard & Poor’s 500, or S&P 500 in short  tracks 500 large companies and is the perennial nemesis of active fund managers charged with the unenviable task of trying to beat it.

The Wilshire 5000 is broader, and is designed to measure the performance of all stocks actively traded in the United States. The Russell 2000 tracks the ups and downs experienced by small cap firms. There are indexes for each sector of the market throughout the planet as well.

“A good way to think about it is like a funnel. You could think about it in terms of the broadest of the broad markets, and then imagine it narrowing to focus on specific types of companies,” says Jim Rowley, head of active-passive portfolio research at Vanguard.

Investors can choose one fund that tracks the global stock market or build their own template with index funds of individual countries or regions.

There are other ways to slice the pie that’s the stock exchange. A lot of indices also track firms based on their size, whether they are small, medium or large. A lot of indices also follow particular sectors, such as manufacturing, healthcare and IT.

Here’s another wrinkle: Bond indices break up the bond market in similar ways. Rather than segmenting bonds by the size of the company, they are grouped according to the creditworthiness of the company (because bonds are a debt instrument). They’re also categorized by the bonds’ maturity. For example, short-term bonds and long-term bonds lie in different baskets. While that might sound somewhat complicated and the availability of so many options might seem overwhelming, don’t give up.

What are index funds?

Index funds are mutual funds or exchange-traded funds that track an index, such as the S&P 500. They are designed to offer investors exposure to a broad swath of the stock exchange at a really low cost. Index funds are distinct from actively managed funds. An active fund and an index fund may consist of stocks of some of the same companies. But the active fund will hold them in several weightings and concentrations in an effort to beat the index, which results in a vastly different set of risks and returns. Index funds consistently outperform most active funds, on top of that, they also carry lower fees.

“One of the good things about index funds is that they’re an excellent start line ,” Vanguard’s Rowley says. Vanguard was founded by John Bogle, the inventor of the index fund. “If you would like to create a broadly diversified, low-cost portfolio, a sensible way is to settle on a U.S. market index fund , a world market fund and investment-grade bonds,” he says.

Consider this example: Vanguard’s Total Stock Market Index Fund includes about 3,600 stocks. Its Total International stock market index Fund is formed from companies in emerging markets and developed countries, excluding the U.S. It consists of 6,270 stocks. That’s almost 10,000 stocks along with a high quality bond fund. 

So that was our post about the best index funds available in Canada today. As you have seen, they all follow the S&P 500. These awesome index funds provide a lot of stocks of the S&P 500 at low cost. They also provide the benefits of diversification and lower risk. With those benefits, it’s no surprise that these are some of the most popular funds available on the market today. Along with discussing some of the best index funds available for Canadian investors, we also discussed various important aspects associated with index funds investing. If you are looking to start investing in index funds, get started soon.