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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.

VIG

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.

VWO

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.

VTI

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.

VEA

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.

VXUS

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.

XIN

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.

XEM

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.

XWD

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.

CWO

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:

The Vanguard Group

Claymore Investments

iShares Canada

As always friends, I look forward to your comments! 

Filed in: Index Investing

15 Responses to "My favourite international equity ETFs"

  1. le says:

    MOA,

    What do you hold for developed international markets? As for VXUS, even though the ETF hasn’t been around for the long, the mutual fund equivalent has been.

    • @Le,

      At this point, I don’t own any ETF for developed international markets. I would like to change that though at some point. Are you thinking about VT or VEA?

      VEA = developed markets of the 16 European and 5 Pacific Rim countries included in the MSCI EAFE Index:
      65% Europe and 35% Pacific Rim.

      Thoughts?

  2. AR says:

    Last correction (sorry about that!)—

    Why use VXUS when VEU have about the same geo and sector weightings with more than 10 times the volume? In fact, I wonder why Vanguard lauch a ETF so similar to VEU.

    For a one-stop-solution to use for dollar-cost-averaging, I think VT is a much cheaper product than XWD.

    ‘I own VWO for now which is almost the inverse of this product, much more emerged markets, less Europe’ – Idon’t get what you mean. Why would it be the inverse? VXUS is just a more broadly diversified ETF that include 24% a Emerging Markets weighting (by the way, VEU as a 26% weighting).

  3. Peter says:

    Great post Mark! Thank you.

    By the way, for the 6 new products Vanguard is planning to launch in Canada, I believe they are all hedged to the Canadian dollar? That makes them unattractive to me, in which case the US versions would still be better, and probably with lower MER’s too.

    • @Peter,

      Well thanks! Glad you liked it. Like I mentioned to TWC, I don’t mind the time writing these posts since not only do I hope these posts help others, this research also formalizes my investing thesis or helps change it! I always want to learn about this stuff. It’s my money after all!

      Yes, Vanguard is coming, just like Christmas! :)

      Kidding aside, I will be interesting to see how the landscape changes or doesn’t with them. I recall some aren’t hedged though?

      I recall Dan Bortolotti gave a nice overview of these “new” products coming to Canada, here:
      http://canadiancouchpotato.com/2011/08/25/meet-the-new-funds-same-as-the-old-funds/

      I’m not yet convinced that hedged-ETFs are better. I dunno, maybe I don’t understand all the pros for them yet? Any reasons you don’t like hedged-products?

      Thanks again for your comment.

  4. Peter says:

    @My Own Advisor
    Oh, probably like what Dan said, hedged products add another layer of risk to it. I mean, US dollar will probably depreciate against Canadian theoretically, but I mean who knows? I can’t predict. And Hedged products always have higher MER’s, so….

  5. JTN says:

    How do you handle currency conversion for these USD ETFs? Sure VWO is cheap but if you lose 1% when you buy USD, is it still worth it? Or do you also prefer the US ETFs because you can diversify currency risk?

    • @JTN,

      Thanks for your question and your comment!

      Personally, I don’t currency hedge. Maybe it’s because I’m comfortable with my strategy or maybe I just don’t know enough yet!

      Here goes my rationale in more detail:

      If I buy an unhedged ETF that tracks US stocks, my returns will suffer when the US dollar drops compared to the loonie.
      On the other hand, I’ll get a boost when the USD appreciates.

      If I use currency hedging I’ll get my return regardless of the currency fluctuations but there is a price for this – more fees.

      So, do I hedge with a promise of higher fees and market returns in my currency OR do I not hedge with a promise of lower fees and market returns in another currency?
      Since I prefer paying as little as possible in fees whenever I can; that’s the primary reason why I own unhedged products.

      I also think it’s a good thing to get some exposure to several other currencies in my portfolio, which is why the Vanguard products are so appealing.

      Regarding U.S.-listed ETFs, I prefer to hold them in my RRSP, since there is no withholding tax. Tax IS in effect when you have a Canadian-listed ETF that holds a US-listed ETF inside it, such as XIN or XSP.

      XIN, holds EFA but is listed in Canada; XIN will pay 15% withholding tax to the IRS before paying the dividends to Canadian investors. That’s not ideal is it!

      Another example, Claymore’s Emerging Markets ETF (CWO), holds the Vanguard Emerging Markets ETF (VWO) like I wrote about. Based on what happens above, 15% tax, again not ideal.

      Summary: If a Canadian ETF only holds a US-listed ETF there is a 15% tax drag because of withholding taxes that are not recoverable when the ETF is held within a RRSP account.

      See this post by Canadian Capitalist for more details:
      http://www.canadiancapitalist.com/how-withholding-taxes-affect-the-choice-of-international-investments/

      At some point, I will cover currency hedging in more detail on my blog, but there are already so many great posts about it. I hope that helps you better understand my approach!

  6. Yet another awesome post. I can’t get enough of the ETF series you’ve been able to pull off this week – a superb job indeed.

    From a personal standpoint, I’ve only recently started to significantly increase my percentage of net worth as it relates to foreign content. Like you, I originally focused mainly on Canadian stocks within the equity component of my portfolio but I’ve recently started adding international positions. Virtually all of my US equity positions are settled in US currency.

    To be honest, I’m nowhere near the 35% that CCP recommends. In fact, my current optimal range sits between 15%-20%, and I’m nowhere near that yet. I’m sure I’ll continue to re-evaluate my weightings over time; however, I don’t see myself getting near the range of 35% in the foreseeable future.

    Despite the low MER with VIG, like you, I’d rather own the individual stocks directly and get better dividend yields.

    VWO is an ETF that appeals to me, and I think you’ve done a great job summarizing what the fund can offer. I really like the international exposure it offers into countries like Brazil, Russia, and China. The MER is also reasonably low. It’s now on my radar thanks to you.

    I like VEA and the thought of having indirect ownership in over 900 companies at a very low MER. I do have a direct position in Novartis, one of the fund’s Top Holdings, and I’ll be sure to visit Vanguard’s website to read up more on it. Andrew Hallam has 30% of his allocation in this international index fund, and that fact alone makes me take note. Good stuff.

    I really like how VTI offers the investor exposure to over 3,000 companies; a great way to diversify. Although I own shares in some of the Top Holdings (XOM & JNJ), this ETF offers a great way to get exposure to a lot of companies at an amazingly low MER.

    Thanks again for such a great run of ETF posts over the past days. I will definitely be using these articles for future reference. :)

    All the best,
    TWC

    • @TWC,

      Thanks again for the kind words and support!

      I think the 35% that CCP is probably too high for me. I’ll probably “end up” around 25%, mostly a mix of U.S. dividend-paying stocks, probably a bunch of VWO, some VEA and some VTI.

      Given the low-value of VWO, I intend to buy more this fall. I hope to have about 10% of my RRSP portfolio in that long-term. I think the exposure to BRIC will be very important in the future.

      VEA seems like a must-hold at some point. If it’s good enough for Andrew Hallam, it’s good enough for many investors!

      I really like VTI as well, but might wait on this one a bit since I’m slowly building my positions directly in U.S. dividend-payers. I only have three now, but all of them are synthetically DRIPping and I’d like to own 3-5 more U.S. stocks like that over the next couple of years. 3,000 companies is pretty hard to beat though, at such a low MER!!

      In summary, I’m going to work on building my RRSP positions in VWO and U.S. dividend-paying stocks over the next 2-3 years. VEA after that and we’ll see if I still need VTI depending how far I get with the U.S. direct holdings.

      As always, I appreciate the detailed comments, really great contributions to the site!

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