Sunday, May 14, 2017

International Equity ETFs

Your diversified ETF portfolio should include at least Canadian, US and International equities and a mix of corporate and government bonds (I also argue that it should be further diversified, with some exposure to REITs and perhaps other investment classes - read details here). As part of the series on how to build up a basic well diversified portfolio, we now look at international ETFs available on the TSX.

Global vs International

When I started out investing, I was confused by some funds calling themselves global and others international, since in everyday use those words mean the same thing.  Investopedia differentiate global and international as investing terms. Essentially global includes all countries, while international funds exclude your own country. However, the situation is confused when the perspective is from Canada, and international funds generally mean funds outside North America.  Confused?  We agree it is confusing!  We are going to lump both global and international funds in this posting.

Narrow the Choices

As we have done in the other categories (see Canadian equities, US equities, broad Canadian bonds), we have narrowed the choices, showing some broadly held good international or global ETFs available on the Canadian market below. In narrowing our choices we looked for widely held, low cost, broadly international products.
While costs in this category are reasonable, and going lower, they are certainly not as low as in the Canadian or US equity ETFs. If you hold $10,000 in funds in one of these ETFs your annual ETF fees, not counting any purchase or sale commissions, will be about $22. Considering the number of different markets these products operate in, this seems like a good deal to me. If you went to a similar international mutual fund your costs would typically be 5 to 10 times higher.

It is important to consider the assets in the fund, since funds with relatively small investments usually involve more in trading costs and the difference between bid and ask price will be more significant. Under the assets column we show in millions of dollars the amount invested in each ETF. All of these ETFs are relatively large and heavily traded, so trading margins are not major issues in this category.

It used to be true that ETFs of this type represented only large and mid capacity stocks, but now the four listed here all have broad exposure across different cap sizes.

There are two approaches to building up internationally diversified ETFs, one can either invest directly in a large basket of securities, or one can assemble a 'fund of funds' that holds different ETFs that in total represent a broad international index. The FoF column shows that for each ETF. If costs are comparable, there is perhaps an argument in favour of the fund of fund approach, since it makes the relative weights more obvious. With a 'fund of funds' I have showed the number of underlying holdings in brackets.

It is also important to realize that iShares and Vanguard follow different international indexes – I explain this here.

The main other differentiators between ETFs in the table are whether the fund includes Canadian, US and emerging markets. More on this below.

What is In?

Key questions to ask yourself is whether you want emerging markets within your global/international ETF, and whether you want US  and Canadian equities within the fund, or prefer to hold those within separate ETFs.  In the table the columns c US and c CAN show whether US or Canadian equities are included.  I personally prefer holding US equities outside the world ETF, because the MER ratio on Canadian or US only equities are less than these global ETFs, but work out the costs of each approach for your own situation.

Another differentiator is whether the fund includes emerging market equity exposure, and that is indicated in the c Em column.

The most similar of the ETFs shown are iShares XAW and Vanguard Canada's VXC.  Both include equities from companies of different sizes, emerging and developed markets, and US (but not Canadian) equities.  Either of these, when coupled with a Canadian equity ETF such as XIC or HXT, provides world wide equity exposure.

Some might argue not to include XEF in the table, since it is confined to developed markets outside North America, without emerging market, Canadian or US content. Nevertheless, holding XEF, one US equity fund, one Canadian equity fund and one emerging market fund would allow you to adjust your holdings in each category.

Other Choices

Because of their somewhat higher MER, I have not included in the table so-called 'fundamental index' international ETFs such as iShares CIE. There are definite advantages to these funds, that follow the so called RAFI Index, that takes into account sales, book value, cash flow and dividends, and the MER is still low compared to what you will pay for any international mutual fund. I will look at these funds in a later posting. CBN, which holds a mix of these fundamental funds, is in particular an attractive choice, although at higher cost.

We have not included US stock exchange listed global and international ETFs, although for some that is a good way to go. For example, VEF is essentially VEA, and the MER is lower if you buy it on the US market (0.07% vs 0.22%).  Look into how your discount brokerage handles foreign fund conversions, and whether you can hold cash in US funds within your account, before deciding to go this route.

There are sound arguments for considering low volatility offerings in this category (XMW is one of my favourites), and we will consider those in a future posting.

Final Thoughts

 Rob Carrick's excellent guide to international and global ETFs is available here.  As always, his commentary is clear, direct and valuable.

The Moneysense 2017 guide to international ETFs is out and available here.  They recommend XAW, XEF and VEE (we will cover VEE in a later post dealing with emerging markets ETFs).  I would agree with their choices of XAW and XEF, and add VEF to the list, particularly if you are a Scotia iTRADE customer, since it is on their list of commission free ETFs.  VEE is emerging markets, so not suitable as a sole international/global ETF.

If you want to combine your US and international in a single ETF, Vanguard VXC and XAW are both excellent choices.  VXC is more widely held, while XAW has marginally lower costs.

It should be kept in mind that both VXC and XAW under-represent emerging markets, and therefore you might want to add XEC, VEE to truly represent the global equity markets.

We  have a posting in progress that will look in general at 'funds of funds', a single ETF which holds a number of other ETFs.  In that we will consider other international choices, such as iShares CBN.

The table just provides a snapshot (at time of writing) of some of the characteristics.  You should consult the documents on companies you are considering purchasing.  They are available here: XAW, XEF, VEF, VXC.

As with any major investment decision, you should consult trusted advice before making your choice. Consider risk and reward, costs and tax implications in your ETF choice.

Here are links to ETFs mentioned in this posting:
Have comments? As always, don't hesitate to leave them, or to connect with us on Twitter.

This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions.  The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  The author of this column holds the following ETFs mentioned in this article in one or more account: XAW, VEF and VXC.  I use Scotia iTRADE discount brokerage. No compensation by any company has been offered, requested or received for writing this column.

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