INDEX FUNDS, EXPLAINED
What is the S&P 500 and how do you invest in it?
The only guide you need to go from complete beginner to fully ready for trading. Made for Canadians, by Canadians.
Key details:
What is the S&P 500
The S&P 500 is a stock market index representing 500 of the largest public companies in the United States, offering a broad snapshot of the U.S. economy.
How can Canadians invest in the S&P 500
The most common way is by purchasing shares of a Canadian-listed Exchange-Traded Fund (ETF) that tracks the S&P 500 index.
Why are ETFs preferred over mutual funds
ETFs typically have significantly lower management expense ratios (MERs) than mutual funds, meaning more of your money stays invested.
You’ve heard it asked before, and maybe even asked it yourself: “How can I beat the market?” It’s stumped some investors, it’s made others shy away from trading altogether.
But not you—you chose to dig deeper instead of giving up. And because of that, you’ll soon see that the real answer is that “how to beat the market” is the wrong question altogether.
The most well-worn path to building long-term wealth isn’t about pouring over individual stocks, it’s about embracing a strategy so powerful and straightforward it has consistently outperformed the vast majority of experts.
That’s index investing—and this guide will show you that path.
What is the S&P 500 and why should you care?
In order to run, you have to walk. So first, the basics: The S&P 500 index is not something you buy directly.
Think of it as the market’s all-star team. The S&P 500 is a list of the 500 largest and most influential public companies in the United States. When you hear the S&P 500 is "up," it means that, on average, these leading companies are doing well.
Why does that matter? The S&P 500 matters, in this case, because it’s the foundation of a powerful philosophy called index investing. This strategy takes the guesswork out of finding stocks, and instead lets you invest in the market’s progress as a whole.
Put another way: instead of trying to find a needle in a haystack, you’re buying into the farm’s success overall. With index investing, you’re no longer trying to outsmart the market. You’re syncing up your portfolio’s growth with it, rising as it does—and that has (historically) been a remarkably steady source to be in sync with, especially as those returns compound over time.
The data doesn’t lie. A 2024 report from S&P Dow Jones Indices consistently shows that the vast majority of professional fund managers—over 90% in most long-term studies—fail to outperform the S&P 500 index. This simple fact is the key to why index investing has become the bedrock strategy for many Canadians looking to invest long term.
What is the smartest way to invest in the S&P 500?
Now that you understand the "what" and the "why," you arrive at the most important decision: how you choose to invest. This directly impacts the value of your investments—and is where you take control.
Because the truth is you don’t have a say in whether the market goes up or down (nobody does). But that doesn’t make you a passenger, it just means you have to turn your focus to the things you do have a say in.
One of the most impactful isn’t even what stock you chose—it’s minimizing the fees that quietly eat away at your returns.
ETFs vs. Mutual Funds: the most important differences
For Canadians, there are two primary vehicles to invest in the S&P 500: Exchange-Traded Funds (ETFs) and mutual funds. While they have a similar purpose, their impact on your wallet is dramatically different.
S&P 500 ETFs:
These are funds that trade on a stock exchange throughout the day, just like a stock. They are known for being highly efficient, transparent, and, most importantly, having very low fees.
S&P 500 Mutual Funds:
These are funds managed by a company, typically purchased through a bank or advisor. They are priced once per day and almost always come with significantly higher fees than ETFs.
If the fees stood out, good! They should. That difference is key—both the ownership fees, and the commission ones. A typical Canadian equity mutual fund can have a management expense ratio (MER) of 1.9% or higher. A comparable S&P 500 ETF can have an MER as low as 0.07%.
Those numbers may look small at first glance, but just like how small contributions to your account add up meaningfully over time, a fund manager siphoning those contributions adds up, too.
In practice: On a $50,000 investment, that seemingly small difference could cost you more than $40,000 in lost growth over a 25-year period.
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MAKE YOUR MONEY BUILD YOUR FUTURE, NOT A FUND MANAGER’S.
Your action plan: How to buy America’s 500 most influential companies in 4 easy steps
This is where understanding the S&P 500 becomes a strategy you can actually put to use with a simple, achievable action plan that will take you from learner to owner.
Step 1: Remember why you’re investing, and pick an account to match
First, you’ll need a self-directed investment account. If you don’t have one, or have never heard of one, it’s just the official way to describe an account that you pick your own investments in.
You can buy and sell ETFs in all of the most popular accounts in Canada, which is good! Choice gives you control. But it also means you’ll need to choose an account before you choose your ETFs. The key to this is remembering your “why”—the reason you’re investing in the first place.
Is it the freedom of a work-optional life? The thrill of buying your first home? The security of knowing your family is protected? Picture it clearly. That is what you’re building towards:
For general goals and max flexibility
A Tax-Free Savings Account is your best tool, blending tax benefits with the ability to withdraw money anytime.
For saving up to retire on your terms
A Registered Retirement Savings Plan (RRSP) is the ideal choice, giving you tax-sheltered growth until retirement.
For saving up to your first down payment
A First Home Savings Account (FHSA) is made for you, with tax advantages to speed up your progress.
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REMEMBER YOUR “WHY” AND FIND THE ACCOUNT THAT MATCHES IT.
Step 2: Fund your account
This may sound obvious, but the obvious steps are the ones you want to make sure you don’t miss, and the sooner you add funds to your account, the sooner you can buy into those top-500 companies.
At Questrade, there are several simple ways to transfer money, each with different benefits:
- Instant deposit: the fastest way to get money into your account, with funds arriving almost right away. You can add up to $10,000 each day with this method (depending on your bank’s rules).
- Scheduled deposits: sync your account contributions up with your pay day so that you never have to think about making a deposit, it just automatically processes.
- Online bill payment: it’s the same processes as paying off a credit card, except the money is still yours at the end.
Step 3: Choose your S&P 500 ETF
Now that your account is all ready to go, it’s time for the fun part: selecting a specific ETF you want to buy by searching its unique ticker symbol.
Like stocks, there are several different ETFs you can choose from. But your goal here isn’t finding the single greatest ETF that has ever existed—like greatest of all-time debates in sports, that’s just a time sink. Don’t get lost in endless research. Analyze just enough to feel confident, then act.
You can find all the information you need right within the Questrade platform by looking up an ETF’s ticker symbol. Here are a few key things to look for in a high-quality S&P 500 ETF:
- A low management fee (also known as its MER): As you know by now, this is the most critical factor. The lower the fee, the more of your money you keep. A good benchmark to keep in mind is looking for ETFs with an MER well under 0.10%.
- High trading volume: in the ETF’s details, you’ll see its daily trading volume. Look for funds that trade in large quantities daily. This high “liquidity” is a sign of a popular, well-established fund that is easy to buy and sell.
- A reputable provider: Stick with ETFs managed by large, globally recognized investment companies like Vanguard or iShares (from BlackRock).
The goal is to avoid paralysis by analysis. Choose a high-quality, low-cost ETF and move forward so you can spend more time holding it in your portfolio, letting it grow.
Step 4: Place your first trade
In your Questrade account, bring up your chosen ETF, enter the number of shares you want to buy, and select “market order” for the most direct purchase. There are other order types you could do, too, but market orders are filled the fastest and give you the best currently available price.
Remember: A major advantage with Questrade is that you pay zero commission to buy any of these ETFs. This ensures that right from the start, every trade you make is more valuable than if you had made the exact same trade at an institution with commission fees.
Congratulations. Just like that, you’re now an investor.
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REMEMBER YOUR “WHY” AND FIND THE ACCOUNT THAT MATCHES IT.
More questions? More answers
This is among the most common questions we hear from investors as they start out, so you’re not alone in not knowing. Think of it this way: "Index fund" is the strategy (passively tracking an index). "ETF" and "mutual fund" are the products you use to execute that strategy. And the core difference between an ETF and a mutual fund is that the ETF is just the modern-day, low-cost product choice.
Since the S&P 500 holds U.S. stocks, currency fluctuations can have a minor impact on your returns. For most long-term investors, an unhedged ETF like VFV or ZSP is a simple and effective choice, as currency effects tend to even out over time.
The U.S. government applies a 15% withholding tax on dividends from U.S. companies. The good news? This is waived for investments held within an RRSP. While it is applied in TFSAs, the impact on your total long-term return from a low-dividend index like the S&P 500 is very small.
All investing involves risk, and the market will always have ups and downs. However, the S&P 500 has a history of recovering from downturns and trending upwards. Index investing is a strategy designed to ride out short-term volatility to capture that resilient long-term growth.
Now, your progress is just one choice away.
You now have the guide, the tools, and the strategy—a clear understanding that was reserved for a select few just a generation ago. The only thing left is to put that knowledge to work.
The great secret to building wealth isn't a secret at all. It is consistency: the simple, powerful act of making regular contributions and allowing the force of compound growth to do its work over time. It is a commitment you make to your future self.
The time for hesitation is over. Your time to build is now.
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build the future you deserve, one etf at a time.
