How to Start Investing in U.S. Stocks

So you have opened a brokerage account, funded your TFSA/RRSP and are ready to invest in the US stock market. If you’re looking at a long page of tickers, you might start to feel confused. Which stocks are buys? Which are less risky? How do you know if this stock is a good long-term hold?

While you can get some solid investment ideas by reading up on other Foolish writers’ picks, I suggest getting your feet wet and starting your US stock investing journey through an exchange-traded fund, or ETF. These funds are traded on stock exchanges and contain portfolios of different stocks.

A very common type of ETF is the index fund, which replicates a passive portfolio of stocks according to a set of rules. A smart way to invest in the US stock market is through index ETFs, which are either the S&P 500 Index or the CRSP Total US Market Index. Let’s take a look at some inexpensive options today!

S&P500

The S&P 500 is a famous stock market index that tracks the 500 largest public companies listed on US stock exchanges. It is used as a measure of the overall performance of the US stock market and is considered the standard benchmark for professional fund managers to beat.

The stocks in the S&P 500 are mostly mega, large, and mid-cap stocks, spanning all 11 stock market sectors, with 27% concentrated in the technology sector. Since its inception in 1957, the index has produced a solid 10% average annualized return, with dividends reinvested.

A great way to buy the S&P 500 in Canadian dollars is through the Vanguard S&P 500 Index ETF (TSX:VFV). VFV costs a management expense ratio (MER) of just 0.08%, or $8 in annual fees for a $10,000 investment, which compares extremely cheaply to actively managed mutual funds.

CRSP US overall market

However, the US stock market doesn’t just stop at 500 stocks. Stocks in the S&P 500 make up about 82% of the entire U.S. market, but there’s another 18% mid- and small-cap stocks worth buying. Here is the Vanguard US Total Market Index ETF (TSX:VUN) comes in.

VUN tracks the CRSP Total US Stock Market Index, which owns over 3,500 large, mid and small-cap stocks listed on US exchanges across all 11 sectors. This makes VUN more diversified than VFV, with a slightly higher level of risk and reward due to the inclusion of more volatile small caps.

Compared to VFV, VUN is more expensive with an expense ratio of 0.16%. For a $10,000 investment, that equates to an annual fee of about $16, which is double VFV but still very affordable compared to mutual funds. If your goal is to buy the entire US stock market, VUN may be a better choice.