Investing, Investing Basics

VFV & VSP: What’s the Difference?

by Modern Money

Summary: Should I Buy VFV or VSP?

What’s the difference between VFV and VSP? The answer is simple. VFV and VSP are both low-cost Canadian Vanguard ETFs that track the S&P 500, but the difference between the two is that VSP is hedged to the Canadian Dollar.

What are Index Funds?

An index fund is a type of mutual fund or exchange traded fund (ETF) that aims to mirror a particular market. Index funds contain a tiny piece of all the companies included in a particular market index (e.g., S&P 500 or the Dow Jones Industrial Average).

Index funds offer a great vehicle to diversify your holdings, as your money is spread out across many companies in an index. Instead of having your eggs in one basket (one security), your eggs are spread out across multiple baskets.

What is Vanguard?

Vanguard was founded by John Bogle in 1975 and that same year Vanguard launched the first index fund, which tracked the S&P 500. Today, Vanguard is the largest issuer of mutual funds in the world and the second-largest issuer of ETFs as well.

Comparing VFV & VSP: The Stats

VFVVSP
Management Expense Ratio (MER)0.09%0.09%
Dividend Yield1.09%1.10%
Withholding Tax (for Canadians)15% (if you want to learn how
you can avoid this, click here)
15%
10 Year Performance290.40%192.56%

To review the full details of VFV & VSP from Vanguard, click on either one.

How Does Hedging Work?

As the underlying investment of VFV and VSP, the S&P 500 Index contains U.S. stocks, therefore investors will face currency fluctuations between the U.S. and Canadian dollar. Currency hedging is a tool that allows Canadians the option to remove this effect, but it does present additional considerations.

Given that VSP is currency-hedged and VFV is not, VSP will not be subject to either the negative or positive impacts that the fluctuations in the currency between the U.S. and Canadian dollar. Historically, the U.S. dollar has shown strength against other currencies during periods of economy uncertainty, which has resulted in stronger returns for investors that didn’t include currency hedging in their strategy.

Should I Buy VFV or VSP?

Well, it depends! Both have a low MER, but are you concerned about potential currency fluctuations with the Canadian dollar remaining strong? If so, the hedged version (VSP) may be for you.

On the other hand, since the U.S. dollar often strengthens against other global currencies during more difficult economic times, which would apply to the Canadian dollar as well, you would experience reduced volatility with VFV during more difficult economic times.

To review the full details of VFV and VSP from Vanguard, click on either one.

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