S&P 500 ETF - Stupid Question

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BullishDouglas
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S&P 500 ETF - Stupid Question

Post by BullishDouglas »

Hello Everyone,

This is my first post on this wonderful looking forum - and I thought I would make a bit of a fool of myself and show that I am a beginner by asking for an explanation for a discrepancy between the returns on one S&P 500 ETF relative to the actual S&P 500.

So I recently bought some shares of the Vanguard S&P 500 Index ETF (TSE: VFV) and the ETF is clearly meant to follow the S&P 500.

However, when I run a 5 year report of this ETF relative to the S&P 500 (on Google Finance) the ETF dramatically outperforms the benchmark index.
I ran some comparisons between the S&P 500 and some other ETFs meant to follow the index, and they were all close over a five year period - I compared with NYSEARCA: SPY, NYSEARCA: VOO, NYSEARCA: IVV.

Someone please help! You can make fun of me on here, as long as I get an answer.

Bullish Douglas Appreciates your time
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AltaRed
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Re: S&P 500 ETF - Stupid Question

Post by AltaRed »

The primary difference is in currency reporting. There is essentially no difference when you convert one or the other to the same currency.
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SoninlawofGus
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Re: S&P 500 ETF - Stupid Question

Post by SoninlawofGus »

AltaRed wrote: 26 Apr 2017 01:49 The primary difference is in currency reporting. There is essentially no difference when you convert one or the other to the same currency.
And it illustrates how currency is really an important benchmark when talking about, especially, Canadian returns. Five year returns for SPY are around 75%, while VFV is closer to 125%. Those aren't small potatoes. There is no benchmark that I'm aware of that considers currency in valuation (for example, CAPE or PE plus a relative currency valuation component).

Over time, things should even out -- hence the notion of a "zero sum game" -- but within any 10-year or so period the impact can be substantial. It's really an under-discussed area IMO (outside of FWF anyway). Many financial books and articles are written from an American perspective, which generally don't discuss currency at all.
BullishDouglas
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Re: S&P 500 ETF - Stupid Question

Post by BullishDouglas »

Thanks for the feedback - this makes sense for sure.

Something I would like to clarify is between what AltaRed and SoninlawofGus are saying. Your guys' response does not necessarily strike me as mutually exclusive, but I am wanting to confirm between your two statements.

AltaRed was saying that it is because of currency and once a currency is converted from one to the other then there is not any real difference.

SoninlawofGus was saying that over the long haul (10 year period) things should even out (presumably because of currencies evening out).

But what about in the more short term? If I were to sell in a year or so while the Canadian dollar was relatively week to the US dollar, would it still even out over the shorter term (as AltaRed seems to elude to)?

Thanks for your help guys
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AltaRed
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Re: S&P 500 ETF - Stupid Question

Post by AltaRed »

It makes no difference really at any given moment. If you sell SPY today, it is worth in X CAD$ and you have a 125% gain as if you owned VFV. If you always think in terms of CAD equivalent when you both buy and sell anything in a non-Canadian currency, you should always be non-confused.
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BullishDouglas
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Re: S&P 500 ETF - Stupid Question

Post by BullishDouglas »

Makes sense!!

Thanks for your help
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SoninlawofGus
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Re: S&P 500 ETF - Stupid Question

Post by SoninlawofGus »

AltaRed wrote: 26 Apr 2017 13:09 It makes no difference really at any given moment. If you sell SPY today, it is worth in X CAD$ and you have a 125% gain as if you owned VFV. If you always think in terms of CAD equivalent when you both buy and sell anything in a non-Canadian currency, you should always be non-confused.
:thumbsup:
BullishDouglas wrote: 26 Apr 2017 12:41 But what about in the more short term? If I were to sell in a year or so while the Canadian dollar was relatively week to the US dollar, would it still even out over the shorter term (as AltaRed seems to elude to)?
Currency gains and losses should even out over long periods of time, though there is not guarantee of that if you bought at, say, $1 CDN = 1 US. It could take 50 years to reach that level or never reach that level again. Or it could go to $1.50. There is always some risk there, though over time it should become less relevant as all markets rise and the CDN/US tends to trade within a wide band (but not 30 cents or $2). I think most here would agree it's much easier to predict markets than currency fluctuations, though neither are predictable in the short term.
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