How to Choose the Index to Invest In for Long-Term Growth in Canada

S&P 500, TSX, and Global Index Funds: A Breakdown for Canadian Investors 

The index you choose to invest in may vary depending on an investor's goals, time horizon, risk tolerance, account type, and the costs associated with a particular fund. Canadian investors often compare the S&P 500, the S&P/TSX Composite Index, and global index funds because each provides a different type of market exposure.

The S&P 500 focuses on large U.S. companies across a range of industries. The S&P/TSX Composite Index focuses on major Canadian companies listed on Canadian exchanges. Global indexes provide broad exposure across multiple countries and regions, including developed and emerging markets.

Index fund investing has become increasingly common because index funds and exchange-traded funds can provide broad market exposure through a single investment. However, no single market index may be suitable for every investor or every portfolio.

This guide explains how different indexes work, how index funds track them, and what Canadian investors may consider when comparing Canadian, U.S., and global index funds in Canada.

Quick Answer: What Is the Best Index to Invest In?

There is no universal best index to invest in. Different indexes may serve different investment objectives and portfolio needs.

For many Canadian investors:

The S&P 500 may appeal to investors seeking exposure to large-cap U.S. companies. The S&P/TSX Composite may appeal to those looking for Canadian market exposure. Global index funds may appeal to investors seeking geographic diversification across multiple countries.

Some investors also use all-in-one portfolio solutions that combine equity and fixed income holdings in a single index ETF. These products often include multiple index funds and may provide broad exposure through one investment.

Rather than focusing solely on finding the best index funds, many investors evaluate how a particular benchmark index fits within a diversified portfolio.

What Is an Index Fund?

A market index is a collection of securities designed to represent a particular market, sector, or segment of the stock market. Examples include the S&P 500, the S&P/TSX Composite Index, and the Dow Jones Industrial Average.

An index fund is an investment product designed to follow the performance of a benchmark index. Index funds aim to mirror the holdings and weighting of the same index as closely as possible.

Index funds typically follow a passively managed approach rather than relying on a fund manager to select securities. This differs from actively managed funds and actively managed mutual funds, where investment management teams make ongoing decisions about which securities to buy or sell.

Index funds can take several forms:

• Index mutual funds

• Index ETFs

• Bond index funds

• Large-cap index funds

• Global equity index funds

• Sector-specific index funds

Index funds track a chosen benchmark by holding many of the securities included in that index. For example, S&P 500 index funds generally hold many of the same companies found in the S&P 500.

Both mutual funds and exchange-traded funds can be used for index investing. When comparing options, investors often review:

• Management expense ratio (MER)

• Expense ratios

• Holdings

• Fund structure

• Trading costs

• Transaction fees

• Minimum investment requirements

• Fund's fees

Rather than selecting individual stocks, investors may use index funds to gain broad market exposure through a single investment.

Why Canadian Investors Use Index Investing

Index investing may appeal to Canadian investors for several reasons. One commonly cited benefit is diversification. Because many index funds hold hundreds or thousands of securities, investors can gain broad exposure across companies, industries, and regions.

Index funds in Canada are also often associated with lower fees compared with many actively managed mutual funds. Since passively managed funds generally follow a predefined benchmark index, investment management costs may be lower than those associated with active funds.

Other factors that may contribute to the popularity of index fund investing include:

• Broad exposure across markets

• Simplicity

• Transparency

• Lower transaction costs

• Access through various investment accounts

Canadian investors can generally access index funds through:

• Tax-Free Savings Accounts (opens in a new tab) (TFSAs)

• Registered Retirement Savings Plans (opens in a new tab) (RRSPs)

• First Home Savings Accounts (opens in a new tab) (FHSAs)

• Registered Education Savings Plans (opens in a new tab) (RESPs)

• Non-registered accounts

• Retirement account arrangements

Account suitability may vary depending on individual circumstances, contribution limits, eligibility requirements, and tax considerations.

While investing in index funds may provide broad market exposure, the choice of index remains important. Different indexes can have different country allocations, sector concentrations, currency exposure, and risk characteristics.

S&P 500 vs TSX: Which Is Better for Canadian Investors?

The comparison between the S&P 500 and the S&P/TSX Composite is one of the most common discussions among Canadian investors.

Understanding the S&P 500

The S&P 500 tracks approximately 500 large publicly traded U.S. companies. Many well-known global brands are represented within the index.

The index includes companies across sectors such as:

• Technology

• Health care

• Consumer discretionary

• Financial services

• Communication services

Because of its composition, the S&P 500 often has significant exposure to large technology companies. Investors who buy index funds linked to the S&P 500 gain access to a broad segment of the U.S. stock market through a single investment.

Canadian investors using U.S.-focused funds may also experience currency exposure because returns can be affected by movements between the Canadian dollar and U.S. dollar.

Understanding the S&P/TSX Composite

The S&P/TSX Composite Index tracks many of the largest companies listed on Canadian stock exchanges.

Compared with the U.S. market, the Canadian market often has greater representation in sectors such as:

• Financials

• Energy

• Materials

• Utilities

Investors seeking Canadian market exposure may look at TSX-focused index funds, index mutual funds, or exchange-traded funds.

Comparing the Two Indexes

Neither index automatically provides every type of diversification. The S&P 500 focuses on one country, while the TSX focuses on another.

For many Canadian investors, the discussion may be less about whether one index is superior and more about how Canadian, U.S., and international exposure fit together within a diversified portfolio.

Are Global Index Funds Better for Diversification?

Global index funds may offer exposure to multiple countries through a single investment vehicle.

Rather than focusing exclusively on Canada or the United States, a global index fund can include:

• Canadian stocks

• U.S. stocks

• International developed markets

• Emerging markets

This geographic diversification may reduce reliance on a single country's stock market.

Many global index funds invest across regions such as:

• North America

• Europe

• Asia-Pacific

• Latin America

• Emerging economies

Some investors use global equity ETFs because they can provide broad exposure without requiring separate allocations to multiple regions.

Global funds may also introduce additional considerations, including:

• Currency exposure

• Regional economic differences

• International market risks

For investors who prefer simplicity, all-world index funds and all-in-one index ETF products can provide access to numerous markets through a single holding.

Popular Indexes by Investor Goal

Different indexes may align with different investment objectives.

Investor goals can vary significantly. Some investors prioritize broad exposure, while others focus on specific regions or asset classes.

A diversified portfolio may include:

• Canadian equities

• U.S. equities

• International equities

• Bond index funds

• Dividend stocks

• Fixed income holdings

The choice of index may depend on factors such as account type, risk tolerance, time horizon, and desired market exposure.

What to Consider Before Choosing an Index Fund

The index itself represents only one part of the decision-making process. The fund that tracks the index can also influence the overall investment experience.

Factors commonly reviewed include:

Investment Goal

Different funds invest in different markets and sectors. Investors often compare whether the fund aligns with their investment objectives.

Time Horizon

Long-term investors may evaluate investments differently than investors with shorter timelines.

Risk Tolerance

Different indexes may experience different levels of volatility. Risk tolerance can influence which types of funds may be considered.

Fees

Fund costs often include:

• Management fees

• Management expense ratio

• Trading costs

• Transaction fees

• Fund's fees

Lower fees may reduce the impact of costs over time.

Diversification

Broad exposure may vary significantly between funds that track Canadian, U.S., or global indexes.

Currency Exposure

Some funds expose investors to foreign currencies, which may influence returns.

Existing Holdings

Multiple index funds can sometimes hold many of the same companies. Reviewing overlap may help investors understand overall portfolio exposure.

Fund Characteristics

Investors often review:

• Net assets

• Inception date

• Tracking accuracy

• Fund company reputation

• Liquidity

Best Index Funds in Canada: What to Look For

When evaluating index funds in Canada, many investors focus on characteristics rather than searching for a single product.

Many index funds aim to provide broad exposure while maintaining a low cost structure.

Common evaluation criteria include:

• Management expense ratio

• Expense ratios

• Tracking accuracy

• Fund size

• Trading volume

• Holdings transparency

• Fund provider reputation

Some investors compare Canadian-listed and U.S.-listed products to understand currency implications and trading costs. Others focus on whether the fund aligns with their existing investment accounts and long-term objectives.

Common Mistakes New Index Investors Make

Index funds work differently than many new investors expect. Several common misunderstandings can affect investment decisions.

Focusing Only on Recent Results

Past performance may receive significant attention, but recent outcomes may not reflect future market conditions.

Assuming One Index Fits Everyone

The S&P 500 is widely followed, but it may not match every investor's objectives, risk tolerance, or desired diversification level.

Ignoring Global Diversification

Investing only in one country may create concentration risk.

Overlooking Costs

Management fees, trading fees, transaction fees, and other expenses can vary among products.

Creating Unnecessary Overlap

Many index funds track similar companies. Holding more index funds does not always increase diversification.

Not Understanding Currency Exposure

Foreign investments may be affected by changes in exchange rates.

Using Stock Indexes for Short-Term Goals

Stock market investments can fluctuate in value, which may not align with short-term financial needs.

Reacting to Market Volatility

While diversification within an index fund can reduce the impact of any single company, index funds still carry market risk and can lose value. 

How to Start Index Investing in Canada

Index investing often follows a structured process.

1. Define the Goal

Examples may include:

• Retirement planning

• Education savings

• First home savings

• General wealth accumulation

2. Choose an Account Type

Investors may consider:

• TFSA

• RRSP

• FHSA

• RESP

• Non-registered account

3. Determine Desired Exposure

Possible areas of focus include:

• Canadian market exposure

• U.S. market exposure

• Global exposure

• Balanced exposure with fixed income

4. Compare Available Funds

When reviewing index mutual funds or index ETFs, investors often compare:

• Fees

• Holdings

• Risk characteristics

• Currency exposure

• Fund structure

5. Establish a Contribution Plan

Some investors contribute through:

• Lump-sum investments

• Regular contributions

• Automated investing arrangements

6. Review Periodically

Changes in goals, income, account contribution room, or risk tolerance may lead investors to reassess portfolio allocations over time.

Ready to compare index investing options? Reviewing investment goals, account types, risk tolerance, and diversification needs may provide useful context when evaluating available funds.

Final Thoughts on the Best Index to Invest In

The question of the best index to invest in does not have a universal answer.

The S&P 500 may appeal to investors seeking exposure to large U.S. companies. The S&P/TSX Composite may appeal to investors seeking Canadian market exposure. Global indexes may appeal to investors seeking broader diversification across countries and regions.

All-in-one index ETF products may also appeal to investors who prefer simplicity and broad exposure through a single holding.

Rather than evaluating any index in isolation, investors often consider how an index fits within a diversified portfolio, alongside factors such as risk tolerance, fees, account type, and long-term investment objectives.

Instead of asking, "What is the best index?" Canadian investors may find it useful to ask, "Which index provides the mix of diversification, exposure, costs, and risk characteristics that aligns with my goals?"