My favourite international equity ETFs
Here we are friends, new post, same message. While dividend-investing takes some time and effort, investing in some ETF products in my opinion, does not.
Hopefully, I’ve already proven that investing in some great Canadian equity and bond ETFs doesn’t take too much effort. Sure, some due diligence is always required for any investment decision, but many of the products I’ve shared in my two previous posts are easy to find and they’re major players in the index investing space. This is great news for you and I – we don’t have to look far to own some of the best ETFs available :)
With low tracking errors and management fees; these ETFs will produce returns very close to the index they track. Using these ETFs are a low-cost, simple way to passively invest in the market. By owning a few of these ETF products, I avoid any stock selection decisions, which can be a good thing, even for someone who likes dividend-paying stocks. I don’t have time nor the energy to research every company. Besides, with index investing, although I’ll never beat the market with these ETFs, I’ll never trail it by much either.
Some time ago, The Globe & Mail ran an article largely about foreign content reminding investors to think and act globally when building their portfolios. This article got me thinking – how much outside Canada should you invest in?
Hopefully at least a bit…
Overall, global/international equity funds did not do well over the last 10 years. You’d be hard pressed to find many global funds or ETFs that delivered anything more than 3% or 4% return in what many financial experts claimed was a lost decade for some international markets. Underperformance to expectations aside, many of the same experts advocate international content is a critical portfolio building block, and I agree with this, but in reference to the Globe article it provided some very loose suggestions for international content:
When Rob Carrick (article author) used several asset allocation calculators offered by online brokerage firms to build a portfolio for a long-term growth-oriented retirement portfolio, it suggested:
“content, including both bonds and stocks, ranged from 50 to 57.5 per cent.”
The article went on to state:
“For a more conservative balanced portfolio, the suggested foreign weighting ranged from 25 per cent to 35 per cent.”
Further, the article introduced Sean Cleary, a finance professor at the Queen’s School of Business in Kingston, who said if he wasn’t so gung ho on Canada right now he would have:
“a breakdown of 20 per cent Canadian stocks and 80 per cent global. Instead, he now suggests a 50-50 split.”
So folks, within this one article, there are suggestions to hold between 20% and 80% of your portfolio in foreign content.
Not exactly a recipe is it?
Personally, I side with Canadian Couch Potato in what he lists in many of his model portfolios. Check him out – it’s a great site. For example, in the ”Global Couch Potato” portfolio, it recommends exposure to stock markets in all developed countries as well as stability in the form of Canadian bonds. Foreign content in the Global Couch Potato is 40% hence the name.
In our age of reliable income and keeping more money for ourselves instead of mutual fund managers (read in, uber-low ETF fees), I would think most investors would do well to mirror “The Cheapskate’s Couch Potato” and more specifically, close to the international content this portfolio suggests, upwards of 35%.
Personally, right now, I don’t focus too much on the global market. Not because I don’t think they’re aren’t good opportunities for ownership “out there”, I’ve simply been busy focusing on home and growing my portfolio on Canadian terra firma first. The way I see it, if I plan to retire in Canada, I might as well invest in Canada. Over the last year or so, now that I’ve build some more substantial holdings in Canadian dividend-paying stocks and ETFs, I’m turning my attention to more foreign content. I believe in the power of international markets, specifically emerged markets as I like to call them. While I own a few U.S. dividend-paying stocks, such as Johnson & Johnson, Abbott Labs and Coca-Cola, longer term I think it makes to take advantage of what the rest of the world has to offer. I’m going to do this by owning some of the international ETFs below.
Since it’s a VERY big world out there, you should probably have some piece of it in your investment portfolio. This post will hopefully help you do just that. The list below identifies my favourite international equity ETFs, why I like them, and if and when I plan to hold them – my last post in this “favourite ETFs” series.
The Vanguard Dividend Appreciation ETF seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time.
- MER is 0.18%.
- Quarterly dividend payments, @ $0.283 quarter.
- Focused on large-cap equity stocks with a record of growing dividends year over year.
- Largest holdings include: McDonald’s, IBM, Chevron, ConocoPhillips, and Coca-Cola.
- Number of stocks = 127.
- Yield = 2.2%
- 10-year return is about 3%.
Disclaimer: While I think this is a great product, I don’t own VIG. Instead, I own a few U.S. dividend-payings stocks directly.
The Vanguard MSCI Emerging Markets ETF seeks to invest in stocks of companies located in emerging markets around the world, such as Brazil, Russia, China, Korea, and Taiwan. The goal of this guy is to closely track the return of the MSCI Emerging Markets Index over the long term.
- Since 2005, ETF inception, the ETF has returned over 11%.
- MER = 0.22%.
- Holds about 900 companies.
- Has high potential for growth but also risk; so best invest long-term (10+ years at least).
- Current yield is close to 2%.
- Annual distribution. Last year was $0.815 USD.
- Top holdings include: Samsung Electronics Co., Ltd., Industrial and Commercial Bank Of China Ltd., Vale
- S.A, and Petroleo Brasileiro SA Petrobras.
- VWO Region Breakdown: Asia = 58%, Latin America = 22%, Europe = 11%, Other = Rest.
Disclaimer: This product is excellent, I own it and don’t plan on selling VWO.
The Vanguard Total Stock Market ETF is an awesome product to own to capture the U.S. stock market.
- Holds almost 3,000 companies.
- Extremely low MER = 0.07%.
- Quarterly dividend payments, @ $0.283 quarter (just like VIG)
- Yields close to 1.8%.
- Top holdings include: Exxon Mobile Corp., Apple Inc., IBM, Microsoft and Johnson & Johnson.
- 10-year return is about 3.6%.
Disclaimer: Another great product from Vanguard. I don’t own this product (yet) but intend to at some point because there is no way I’ll ever be able to own 3,000 U.S. stocks.
The Vanguard MSCI EAFE ETF seeks to track the investment performance of the MSCI EAFE Index. It invests in the developed markets of the 16 European and 5 Pacific Rim countries included in the MSCI EAFE Index.
- Top holdings include: Royal Dutch Shell PLC, BHP Billiton Ltd., Nestle SA and Novartis.
- Great for owning European companies, 65% of holdings. The rest is emerging (emerged) markets.
- Holds over 900 companies.
- Dirt cheap, MER = 0.12%.
- Yield is pretty much nothing, last distribution was $0.012 in March 2011.
- 5-year return was -2.5%.
Disclaimer: I don’t own this product and don’t intend to for a few years at least. I want to focus on building my position in VWO first since I personally feel more economic growth and yield, will come from emerged markets in the decades to come. This one and VTI will have to wait.
The Vanguard Total International Stock ETF seeks to track the performance of the MSCI All Country World ex USA Investable Market Index, which measures the investment return of stocks issued by companies located outside the United States.
- VXUS gives you broad exposure across developed and emerging non-U.S. equity markets
- Follows a passively managed, index replication approach.
- Low MER = 0.20%.
- Tracks emerging (emerged) markets in Europe, Asia, S.A. and Africa.
- Very, very diversified; holds over 6,500 companies.
- Canadian Couch Potato really got my attention when he did a review of this ETF.
- Top holdings include: Royal Dutch Shell PLC, BHP Billiton Ltd., Nestle SA and Novartis (same as VEA).
Disclaimer: I don’t own this product and don’t intend to. This product was just launched this year and I’m going to see how this one goes long before I invest it in. Seems like an outstanding product though. Besides, I own VWO for now which is almost the inverse of this product, much more emerged markets, less Europe – which aligns with my investment objectives and thesis of economic growth in the Eastern world. Can you ever be over-diversified? Over 6,500 companies is a bundle, wow.
The iShares MSCI EAFE Index Fund (CAD-Hedged) seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the MSCI® EAFE 100% Hedged to CAD Dollars Index, net of expenses. The Index is a free float-adjusted market capitalization-weighted Index provided by MSCI that includes securities from Europe, Australasia and the Far East, hedged to Canadian Dollars.
- MER = 0.50%.
- Over 900 holdings.
- Top countries: UK = 22%, Japan = 22%, France = 9%, Australia = 9%, Other = Rest.
- 5-year return was -6.5%
Disclaimer: I don’t own this product and don’t intend to. The MER is too high for my liking and I’m convinced hedged-products are a must for me.
The iShares MSCI Emerging Markets Index Fund seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the MSCI Emerging Markets Index, net of expenses. The MSCI Emerging Markets Index is a free float-adjusted market capitalization weighted index provided by MSCI that is designed to measure the sequity market performance of emerging markets. It has an MER of 0.79%. OK product, but why not own VWO?
Disclaimer: I don’t own this product and don’t intend to. The MER is too high for my liking.
The iShares MSCI World Index Fund seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the MSCI World Index, net of expenses. The MSCI World Index is a free float-adjusted market capitalization weighted index provided by MSCI that is designed to measure the equity market performance of developed markets.
- This ETF is a fund of funds: iShares S&P 500 (50%) + iShares MSCI EAFE Index (45%) + iShares MSCI Canada Index (5%)
- MER = 0.46%.
- Over 1500 holdings.
- Since inception = 5.81% return.
Disclaimer: Another great product, for diversification, but for the price, I’d rather own VTI for the U.S. holdings (which will cost me much, much less) and I already own VWO. Why bother with the 5% Canada Index if you own another Canadian equity ETF? Could be just me wondering this.
The Claymore Broad Emerging Markets ETF has been designed to provide investors with exposure to the return and performance of an Emerging Markets Benchmark Index, net of expenses. The Claymore Broad Emerging Markets ETF currently tracks the MSCI® Emerging Markets Index and is invested in the Vanguard Emerging Markets ETF. Hedging currency exposure to reduce the impact of fluctuations in exchange rates on the Claymore Broad Emerging Markets ETF is intended to reduce the direct exposure to non-Canadian dollar currency risk for unitholders of such fund.
- Over 900 holdings
- Top fund holdings: VWO, 100%.
- MER = 0.71%.
Disclaimer: I don’t own this product and probably won’t since I already own VWO. The MER for VWO is 0.22%, nice and cheap. Like me somedays
Phew – that was a post!
Recognizing there are many more international equity ETFs that I didn’t mention above, I hope my list of favourites was an excellent starter to help you navigate in this space. No doubt, you’ve noticed my bias towards Vanguard because I know from my own experience, fees are forever, and those money management fees can have a HUGE negative impact on your portfolio returns. I want my fees as low as possible with the best possible products available. I’ve started that process.
You probably also read that I’m not convinced about hedged-products. This is because my experience and some statistics have shown that foreign ETFs are typically better in terms of tracking errors for the index they follow; this means the foreign ETF should outperform the hedged-product over the long haul. I think hedging is not absolutely necessary for investors since the investor (me) is now “open” to a diversified basket of currencies, which actually reduces some currency risk over the long haul: maybe our dollar will appreciate against the U.S. dollar, maybe it won’t, maybe it will depreciate against the Japanese Yen or appreciate against the Chinese Yuan? Who really knows, but I’m willing to risk it. That’s the key. No hedging, you’re taking some risk so be comfortable with that. Personal finance is afterall, personal!
In closing, I hope you enjoyed this series about my favourite ETFs. Some products I love, others not so much, but all in all, ETFs are an excellent tool for the index investor to achieve their retirement objectives. I’m hooked. What about you, maybe you are too!?
What do you think of my favourite international equity ETFs?
Did I leave any of your favourites out?
Do you own any international equity ETFs yourself and if so, which ones and why?
For more research, check out these sites:
As always friends, I look forward to your comments!