Investing can be as simple as buying the index, such as the very popular Vanguard S&P 500 ETF (TSX: VFV), and adding to the position steadily over time. And, in short, yes, the VFV isn’t just a good ETF for Canadian investors; it’s an absolutely fantastic one on many fronts.
From minimizing management expense ratios (MERs), which currently sit at a rock-bottom 0.09%, to gaining broad exposure to the U.S. market, which includes a good chunk of exposure to mega-cap tech and the AI theme, it’s hard to go wrong with an ETF that follows the S&P 500.
Even the great Warren Buffett is a fan of the S&P 500, and it’s really hard to go against that, whether you’re a new investor or a seasoned trader who’s looking to take on more of a passive approach for a change.
While you won’t win many marks at the dinner table about your new investment in an S&P 500 index ETF, I think that the “boring,” steady way to invest is hard to top unless, of course, you’re a seasoned stock picker with a strong stomach and the ability to forecast cash flows way out into the future.
In any case, most Canadians can stop at the S&P 500 and do extraordinarily well over time. The VFV, which is an unhedged version, is about as efficient as it gets.
The VFV is up nearly 93% in the past three years, or about 41% in the last two. Of course, these incredible returns in the rearview shouldn’t be an expectation for the next two or five years, especially once the next bear market (it’s likely in the next five years, especially, at least in my view, given where valuations are at and how we’re starting to get overdue for one).
What could happen to the VFV if the AI trade blows up?
With AI continuing to be in the driver’s seat (that’s especially the case for the S&P 500), questions linger as to what could happen if there is an AI bubble and it does burst suddenly. In my view, it’s hard to justify the heightened multiples in the S&P 500 unless you believe in the AI boom. And when you consider how much of the future of the AI trade (and, in turn, the S&P 500) depends on just OpenAI and Anthropic, the two frontier labs dominating the headlines, perhaps things could go either way in the coming years.
If AI delivers the productivity gains that bulls have been hoping for, the S&P 500 could have stronger years ahead of it (though I am skeptical that another 41% gain could be in the cards for the next two years). At the same time, it’s hard to imagine how vicious the next correction could be if OpenAI or Anthropic were to show some cracks in their armour.
Both firms are already spending exorbitant sums to advance the effort. And, with that, the stakes could rise if the race at the frontier slows to a stroll rather than a sprint or if some form of plateau hits, pushing out those AGI and superintelligence predictions way down the road. I don’t know what’s next for the AI theme, but if AI is in for a winter due to some fumble by the frontier labs, don’t rule out a bear market in the S&P 500.
The bottom line
For now, there’s limited evidence to suggest that hyperscalers are going to wind down their spending. And, with that in mind, I still believe the VFV and the S&P to be a great option. Still, the TSX Index seems far better-insulated from an AI upset. For the VFV, there might be no place to hide if AI goes bust and big tech goes down.