The S&P 500 Is Not The Entire Stock Market

It annoys me to no end whenever someone says how the stock market is overvalued just because of the S&P 500. This came up in a previous post The AI Bubble Is Smaller Than You Think. I discussed a few things in that post, but the main point is that people are confusing two things: the overrepresentation of the magnificent 7 + Broadcom and the AI bubble.

But I’m starting to think that this post didn’t go far enough. That post was about the S&P 500, in this post I’d like to argue that the S&P 500 is not the entire stock market.

For example I invest in Canadian banks. Those aren’t in the S&P 500 because the S&P 500 only includes companies based in the US. But lately I’ve been a bit wary of them due to them trading at historically high P/E ratios. It’s funny because they trade at a P/E of 15 which for any other industry would be very low. Not for Canadian banks apparently.

I even watched someone from TD (a Canadian Bank) discuss this.

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Which is a bit ironic. Or maybe it’s reverse psychology because TD is scheduled to do a share buyback in 2026.

I still think Canadian Banks are fine as an investment, but they may not be the best investment. So I was thinking of diversifying. What to invest in then?

Then I thought back to a TD ETF called TGRO that I invested in a while back and did very well. What’s that? Well, TGRO is a single ETF that contains several other ETFs: a US ETF (that performs similarly to the S&P 500), a Canadian ETF (that performs similarly to the TSX (Toronto Stock Exchange) index, let’s just call it the TSX), a global ex-North America ETF, and a bond ETF.

These ETFs appear to be TD’s Core ETFs as they appear over and over again such as in the ETFs TEQT, TBAL, and TCON. These ETFs just change the number of bonds they hold.

And other companies have very similar ETFs. So there is also a VEQT, VGRO, VBAL, VCON, XEQT, XGRO, and XBAL. The V stands for Vanguard and the X stands for iShares.

The iShares ones also holds emerging markets. So those are your primary options if you’re not happy with the S&P 500: TSX stocks, global ex-NA stocks, emerging market stocks, and bonds. There are also ETFs with different indexes (like tech or medical or infrastructure) and different weighting. For example there is an equal weight S&P 500 which weights all companies equally. But I’d be cautious investing in any of these more ‘creative’ ETFs. So whenever someone complains about the S&P 500 I just want to slap them. There is a whole world beyond the S&P 500.

Of course there’s a bit of a problem: not all of these options perform very well. Bonds are very safe but boring with low returns. Emerging market stocks have performed terribly. Global ex-NA has done fairly well (especially this year), but still nowhere near US stocks. US stocks have historically outperformed everything.

However there is one index that is not too far behind, especially when you reinvest dividends, and that is the TSX. In fact the TSX has actually outperformed the S&P this year. Some people think it’s just due to gold. It could have something to do with that, the TSX has a lot of mining companies. Although it’s also worth noting I recently read an article discussing how the oil sands are booming.

I actually expect the TSX to continue to outperform. For a few reasons. First there is Carney’s aggressive five-year plan which is expected to increase GDP by 3.5%. Then there’s removing internal trade barriers which some say will increase GDP by 8%. Although I highly doubt it, others say 3–4% but that still seems incredibly high to me. And recently Carney somehow convinced the UAE to invest 70 billion CAD. Then I read a story about how the US boycotting the G20 meeting could be good for Canada.

It’s like Canada can’t stop winning, I love it. Just don’t call them tailwinds because that’s not how a sailboat works. Also for planes tailwinds are bad for takeoff. I hate that analogy so much.

The only thing I don’t like about the TSX is that one company makes up a huge portion of it. And that stock is trading at a P/E of over 100. That stock is Shopify.

Now, it could be worse. At least they’re not Tesla with declining profits and a P/E of over 200. Apparently they’re heavily reinvesting in themselves similar to what Amazon was doing, and they are seeing 30% yoy growth so it’s not a ridiculous valuation. I’m still not happy with it making up 7% of the TSX but it’s not that bad. I guess it’s Canada’s ‘big tech’.

So if you’re not happy with the S&P 500 you could join me in investing in the TSX. The water’s fine. Not investment advice but I feel very good about the TSX.

Or you could invest in global ex-NA. It tends to underperform, but it is the most diversified being global and all. Or do what ETFs like TEQT do and invest in all of them. If you give them equal weight and the AI bubble wipes out the S&P (which I already argued in my previous post is unlikely) it won’t hurt your portfolio that much.

Honestly, what I fear about the US is a debt crisis which will mean the US is forced to print money causing massive inflation. There are currency-hedged ETFs which will reduce the risk however there is a cost to this. Use at your own risk.

Finally I should note that markets do appear a bit overheated right now. I noted before that Canadian banks have [relatively] high P/Es. However, just because they look overheated doesn’t necessarily mean they will fall anytime soon.

Although maybe this doesn’t matter too much. I still think the possibility of the AI bubble popping and doing a lot of damage to the S&P is low. It could cause a broader market selloff, but then nowhere is safe. Maybe you could just put everything in TEQT or VEQT or XEQT. The only downside is that you can’t control the weightings of each underlying ETF individually, but they are still very safe. Just do whatever you want.