Our favourite U.S. equity funds

This isn't to say the U.S. market can't rise higher. Nor is it an argument against investing in U.S. stocks. There's a very strong case for them on diversification grounds. Dominated by the financials, energy and materials sectors, the Canadian market offers scant exposure to technology, health care and consumer stocks, which make up large chunks of the S&P 500.

What's more, commodity prices affect the Canadian economy to a far greater degree. The U.S. may be the biggest consumer of Canada's oil, gas and other commodities, but demand from China and other fast-growing emerging markets has grown more quickly, making economic activity outside the U.S. a big driver of commodity prices. Lastly, because the U.S. and Canadian dollars may behave differently, U.S. stocks provide currency diversification.

As a result, the U.S. and Canadian markets don't move in lock-step, despite their geographic proximity. Over the past decade, the S&P/TSX Composite's correlation with the S&P 500 Index, as measured by R-squared, has been just 49% (an R-squared of 100% would indicate perfect correlation). By contrast, the TSX benchmark's correlation with the MSCI Emerging Markets index is 76%, reflecting the emerging world's influence on the Canadian markets. The TSX is also more closely tied to the global market than the U.S. The TSX's correlation with the MSCI World Index is 64%.

Unfortunately for Canadian fund investors, the U.S. Equity category is a pretty shabby lot: While the S&P 500 has returned 5.3% annually over the past 10 years (in Canadian dollar terms), the median U.S. equity fund is up just 3.8%. This gap is more likely explained by high fees than manager ineptitude. The median U.S. Equity fund levies a 2.5% management-expense ratio -- a daunting hurdle for even the best manager, especially in a highly efficient market like the Unites States. Amid this backdrop, the ETF route may be more appealing for those who can invest in them. The iShares S&P 500 ETF XUS recently dropped its management fee to 0.1% a year. Most active U.S. equity managers will be hard pressed to beat ETFs over the long term.

Fortunately, those opting for active management (or those without a choice) do have a few appealing choices. Below you'll find a list of our favourites.

 Fidelity U.S. All Cap   : Launched in 2013, this relatively new fund is led by a 15-year Fidelity veteran, John Roth. Roth has delivered twice the S&P 500's gains at his most recent assignment, U.S.-domiciled Fidelity New Millennium, which he has managed since 2006. As the fund's name implies, he employs an all-cap approach, giving the fund exposure to smaller names than most funds in the category. That bent, in combination with his growth-leaning style, can make for a bumpy ride. Roth has managed volatility reasonably well, though, by maintaining a well-diversified portfolio and by keeping the position sizes of his riskiest holdings small. He also benefits from Fidelity's 70-member U.S. research team, an army of analysts any Canadian firm would be hard-pressed to match, at least in size.

 CI American Value   : Managers David Pearl, William Priest and Michael Welhoelter, all co-founders of subadvisor Epoch Investment Partners, prize free cash flow growth. Their sector positioning doesn't vary drastically from the S&P 500, though the 60-stock portfolio is hardly a benchmark clone. Granted, this fund hasn't been a strong performer in recent years, but its long-term record remains stellar. TD Bank purchased Epoch in late 2012, raising the risk that CI could end its relationship with Epoch. Management stability is a potential worry, but TD built in plenty of financial incentives for Epoch managers to stick around, at least in the short- and intermediate-term. Investors can also invest in the strategy through TD U.S. Large-Cap Value.

 RBC O'Shaughnessy U.S. Value   : When manager Jim O'Shaughnessy launched his funds in 1997, few rivals employed quantitative approaches. These days, it's far more commonplace, so O'Shaughnessy, who subadvises this offering for RBC, has had to work harder to stay ahead. He has tweaked his approach in recent years to boost the fund's exposure to the quant model's favourite stocks, for example. The model looks for relatively cheap stocks with strong balance sheets and earnings growth, with a compact list of 50 stocks making the final cut. The fund has been successful since updating its model in 2011, which could bode well for the future. The fund has a big advantage on fees: The A Series' 1.56% MER is among the lowest of any advisor-sold U.S. equity fund. DIY investors will also find the D Series' 1.23% MER appealing. The fund won't offer the same currency benefits as other funds on this list, as it hedges its U.S. dollar exposure.

 TD U.S. Blue Chip Equity   : This fund favours well-known large-cap U.S. stocks, though it also holds a smattering of up-and-comers. Manager Larry Puglia of subadvisor T. Rowe Price has led the U.S.-domiciled version of this fund since 1993, making him one of the most seasoned U.S. equity managers available in Canada. His growth-oriented style courts volatility, though the quantitative risk management tools he has used since 2007 has helped keep it in check. The fund's risk/reward profile has looked superior to its rivals since then. Like his Fidelity competitor, Puglia benefits from a big team of analysts for support.

 RBC North American Value   : This fund holds appeal for investors seeking domestic and U.S. exposure in one fell swoop. Managers Stu Kedwell and Doug Raymond enjoy the flexibility to invest in Canada and the U.S. based on where they see opportunity. Their approach starts with RBC's quantitative screening tool to winnow their universe, and then the duo looks for companies with high returns on invested capital. While they are value oriented, they avoid turnaround plays. The team's record tops most of its rivals in the Canadian Focused Equity category.