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Top International Equity ETFs for your portfolio

ETFs

Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve.” – Talmud, circa 1200 B.C.-500 A.D.

Last month, I provided you some of my favourite Canadian equity and bond ETFs to consider for your portfolio.  While Canadian holdings in your portfolio are important if you’re a Canadian and you plan on retiring in Canada; using Canadian money for retirement income, they aren’t the only investments you should own.  This is because global equity investments can balance out your portfolio and potentially deliver some healthy returns for you.

While expert opinions vary, how much foreign content you should own in your portfolio, financial pros usually agree on this:  diversification is essential to manage risk.  Diversifying across asset classes and within an asset class reduces risk to a particular company, sector, or market segment.  While diversification cannot prevent an investment loss, it can definitely help mitigate a catastrophic one.

To help with diversification in your portfolio consider some of the following top international equity Exchange Traded Funds (ETFs) below.

VIG:US

The Vanguard Dividend Appreciation ETF seeks to track an index that measures companies with a record of growing their dividends year after year.

  • MER = 0.10% (since my last post, was 0.18%).
  • Top-3 holdings:  PepsiCo, Procter & Gamble, Coca-Cola.
  • Number of stocks = 146.

VWO:US

The Vanguard FTSE Emerging Markets ETF seeks to invest in stocks of companies located in emerging markets around the world, such as China, Brazil, and South Africa.

  • MER = 0.18% (since my last post, was 0.22%).
  • Top-3 holdings:  Taiwan Semiconductor, Petroleo Brasilerio, China Mobile.

VTI:US

The Vanguard Total Stock Market ETF is an awesome product to own to capture the U.S. stock market.  Yes, I’m biased with this one.

  • Holds over 3,500 companies.
  • Extremely low MER = 0.05%
  • Top-3 holdings:  Exxon Mobile Corp., Apple Inc., Microsoft.

VEA:US

The Vanguard FTSE Developed Markets ETF seeks to track the investment performance of the FSTE Develop Market index, ex-North America.

  • MER = 0.10%.
  • Top-3 holdings:  Nestle SA, Royal Dutch Shell PLC, HSBC Holdings PLC.

VXUS:US

The Vanguard Total International Stock ETF gives investors broad exposure to major stock markets around the world, ex-United States.

  • MER = 0.16%.
  • Very diversified; holds over 5,700 companies.
  • Top-3 holdings:  Nestle SA, Royal Dutch Shell PLC, HSBC Holdings PLC.

XIN

The iShares MSCI EAFE Index Fund ETF (hedged in Canadian dollars) provides investors with broad exposure to countries in Europe, Australasia and the Far East.

  • MER = 0.50%.
  • Over 900 holdings.
  • Top countries:  Japan, UK, Switzerland, France, Germany.
  • Top-3 holdings:  Nestle SA, HSBC Holdings PLC, Roche Holding AG.

XWD

The iShares MSCI World Index Fund ETF provides investors to broad exposure to the equity market performance of developed markets.

  • MER = 0.47%.
  • Over 1,500 holdings.
  • Top countries:  US (>50%), Japan, UK, Canada, Switzerland.

VEF

Vanguard Canada’s FTSE Developed ex-North America Index ETF (CAD-hedged) will track the broad global equity index.

  • MER = 0.28%.
  • Over 1,200 holdings.
  • Top countries:   Japan, UK, Switzerland, France, Germany.

VUS

Vanguard Canada’s U.S. Total Market Index ETF (CAD-hedged) seeks to track, to the extent reasonably possible, the performance of securities included in the CRSP US Total Market Index (CAD-hedged) back to the Canadian dollar.

  • MER = 0.17%.
  • Over 3,500 holdings.

How many of these ETFs do you need in your RRSP?  Well, in my opinion definitely not all of them.  Thanks to a reader question, in a future blogpost later this summer.

If you want to invest in other ETFs or you’re already invested in some ETFs and surprised that some of your products didn’t make my list above, don’t worry too much.  These were my favourites and most of these are tailored to your RRSP account.  I wrote most, not all, since not all ETFs are created equal.  If you want to hold international investments in your portfolio, be cautious where you own them since they can cause some issues from a tax perspective.  There is much more to that story so I encourage you to read this page on my site to learn more about withholding taxes in particular.  You might be paying withholding taxes right now, and not realize it.  Personally, I figure I pay enough taxes and because I’m assuming you feel the same, I encourage you to check that page out.

In closing, while investing in Canada and with Canadian ETFs makes sense for many of us, consider spreading your investment wings and see the rest of the world, ensuring you put the right products in the right accounts.  Your investment portfolio will be much healthier overall for it.

Filed in: Asset Allocation, Exchange Traded Funds (ETFs), Index Investing, RRSP

25 Responses to "Top International Equity ETFs for your portfolio"

  1. Spooky says:

    Thanks for this post. BTW I really like your blog as I have learnt so much.

    I currently own VTI and VXUS inside my RRSP. I was wondering if there is no more room inside the RRSP where I can invest in these ETFs and keep my % in my portfolio balanced to the proper amounts? Is there a better international ETF to own for my non-registered account?

    Even though. I hate paying more tax I would like the opportunity to make more money and keep my portfolio diversified. Thanks.

    • Good call on VTI and VXUS in RRSP, I think those are great products, but I’m biased since I own them as well. :)

      If you have no more room in your RRSP, but still want that type of exposure in your TFSA, just be careful.

      Read here:
      http://www.myownadvisor.ca/indexing/

      A Canadian ETF that holds international stocks (example Vanguard’s VFV), held in a non-registered account, will have withholding taxes applied (15%) but they are recoverable when investors file their income tax returns. In an RRSP or TFSA withholding taxes apply and you cannot claim a credit for this.

      A Canadian ETF that holds US stocks (example Vanguard’s VUS), held in a non-registered account, will have withholding taxes applied (15%) but they are recoverable. In an RRSP or TFSA withholding taxes apply and you cannot claim a credit for this.

      In summary: In a non-registered account, you will pay the withholding tax if you use ETFs like VFV but you can reclaim it. In a TFSA, you will pay the withholding tax and cannot reclaim it.

      So, while you might be seeking room outside your RRSP to invest in such similar ETFs, just be sure you know the rules.

      In the end, the best place to own international ETFs and U.S.-listed ETFs is in your RRSP. Use your TFSA for primarily Canadian bonds, Canadian ETFs or Canadian stocks.

      I hope this information helped?

  2. Currently my portfolio is about 75% Canadian, and 25% American (and other – small percentage) companies. I’m planning on rebalancing later this year (in October) so I’ll be able to analyze it then. Thanks for the tips.

  3. Helen S. says:

    Hi: First, I love your articles!!!!

    I am not new to equity investing; I am currently with an advisor at RBC-DS, but I want to get rid of paying 1.5% fee for the management of my portfolio and set up my own portfolio of excellent dividend paying and share price growth stocks (one want to grow the portfolio value, after all….) and great TETFs.

    About these ETF’s. I want to structure a mostly ETF portfolio (Non-registered, RRSP, LIRA, TFSA). But, I’m confused as to how to establish some criteria to select the right ETF’s.

    What is the best way to determine, or see their performance, and then go about selecting the “right” ETF’s. Also, what percentage proportion of my portfolio would be appropriate for each ETF? Eg.: 10% in each ETF? 20% in each?

    Which are the best ETF’s to generate a steady dividend payment stream, which I would use monthly to suppliment my income? What is the yield?

    Also, what is the best online monitoring and tracking tool to manage the portfolio? The Globe and Mail portfolio tracking tool?

    Thank you.

    • Hey Helen,

      Thanks for writing.

      Lots of questions in your comment, so I’ll try and answer them as best as I can one by one…

      Regarding the ETFs, I personally use the ones that offer the most diversification for the lowest cost.

      For the U.S. market, that means a good choice is VTI.

      For the international market, that means a good choice is VXUS.

      There really is no “right” ETF. There are a bunch of great ETFs and even then, they all offer different things; few of them are the same. I would suggest you determine your investment goals first, then figure out the best products to line up with those goals.

      Regarding the allocation and percentages for each ETF, it really depends on your risk profile. I would argue most investors could do very well long-term if they stuck to owning 3-4 ETFs: A Canadian bond, a Canadian equity, a U.S. equity and an International equity. At most, you probably only need to own about 6-7 ETFs, tops, to have some exposure to a “little bit of everything”. In addition to the above, you could own a REIT ETF and maybe divide the International equity between Developed and Emerging markets.

      The portfolio of ETFs doesn’t need to be very complicated.

      There are a few Canadian ETF that would generate a steady dividend payment stream: XDV, CDZ and ZDV come to mind. You can read my post about that here:
      http://www.myownadvisor.ca/2013/04/top-canadian-dividend-etfs-for-your-portfolio/

      If you own ETFs, you don’t need much in the ways of an online tracking tool to manage your portfolio. You can easily look up the returns of each ETF via the respective transparent websites.

      I hope this information helped you out, and if not, feel free to drop me an email.

  4. Brian says:

    Good to see that a few I own are on the list! Just got into ETF investing within the last few months and it’s certainly better than the mutual funds I left behind!

  5. Spooky says:

    Thanks for the reply MOA. Just one more question. Can I still own VTI and VXUS in my non-reg account instead of owning VFV and VUS? I don’t mind paying the withholding tax as long as I can claim it.

    Thanks for the heads up on the TFSA not allowing you to claim the withholding tax.

    • No probs….

      Yes, of course you can hold VTI and VXUS in a non-reg account instead of owning VFV and VUS.

      However….

      With US-listed ETFs (like VTI) the US withholding tax part is recoverable in a non-registered account. Come tax season you’ll get a T5 slip that specifies what you paid and you can recover that on your tax return.

      My understanding is, a US-listed ETF holds international stocks (VXUS), there’s more withholding taxes applied because of the stocks from those countries. There is no way to recover that “international” tax. Only the U.S. withholding tax is recoverable. In a taxable account, international withholding taxes always apply and are never recoverable.

      So, for this reason:

      A) It’s always best to put US-stocks and US-listed ETFs in your RRSP.
      B) It could be a good idea to put CDN-listed ETFs that hold a US-listed ETF or US stocks (VFV and VUS) non-registered, since you can recover the US withholding taxes paid come tax-time.
      C) Use the TFSA for Canadian stocks or Canadian-listed ETFs that hold Canadian stocks, only. Then you have no headaches about withholding taxes with those types of investments :)

      You can always speak to a financial pro to confirm.

      Cheers,
      Mark

  6. Rob aka Mr BTSX says:

    Very good timing for this post as I am looking at diversifying outside of Canada. My current portfolio is my 10 stock Beating the TSX and Rio Can (REIT) and Abeerdeen Asia Pacific (closed end MF which deals in bonds) but I really need some exposure to the US. I debated buying individual stocks but the market is just too huge so it’s going to be ETFs.

    Sadly because I’m no longer a resident of Canada I can’t avoid the withholding tax

    Rob

    • Great Rob, I planned this post well then?

      Agreed, the international and US markets are too big not to buy ETFs. Besides, you get the ride returns :)

      As for Canada, how is the BTSX coming along this year? REI.UN would have been a good pick. I hold that one and don’t intend on selling.

      As a non-resident, now, are there tax-free accounts where you live?

  7. Rob aka Mr BTSX says:

    @My Own Advisor

    I live in Germany and they have an interesting product called a Reister pension, kind of cross between an RSP and a DB pension. You can put in up to 20 grand per couple and get a tax break, but where the difference lies is in it has to convert to an annuity once you retire, so once you sign up they give you a projection of what you can expect in retirement, based on various rates of return, from 3% to 10%.

    What was interesting was in researching this was the same advice came up, costs matter! Care who you buy this from as many advisers end up making more money than the client!

    yes somethings never change.

    One question VTI:US what is a realistic long term rate of return? I like to run long term projections eg X invested for X years at X percent as part of my retirement planning.

    • Hey Rob,

      $20 grand per couple is pretty good but HAS to convert to an annuity? What is annuity rates are crap?

      Fees always matter. I realize this so much more now.

      Depending upon the withholding taxes you might face, I think VTI:US is a great product. Since I don’t have any withholding taxes in my RRSP here in Canada for U.S. stocks or U.S.-listed ETFs, then it’s a great holding for me than I never plan on selling.

      Here is some VTI information:
      https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT#tab=1

      10-year returns = 8.4%

      I would expect VTI to follow the returns of the U.S. stock market over time, which over a longer investing period, should give you 7-9%. I’ll take that.

      Cheers,
      Mark

      • Rob aka Mr BTSX says:

        Thanks, this has been a big help. I’ve given it a lot of thought and decided I need to divesify outside of Canada, I did briefly consider buying stocks but the US market is so vast it’s hard to now where to start so ETFs will be the way to go. I’ll probalby go the route Andrew Hallam suggusts 1/3 US 1/3 International and 1/3 bonds. Makes rebalancing easier and I don’t have to worry about trying to guess the direction of the market. Of course find the right ETF is one thing, finding the money is another:)

        • Hey Rob,

          I think what Andrew Hallam does with his portfolio is not only logical but simple. It makes me wonder about my portfolio actually. I mean, if three indexed products are good enough Millionaire Teacher, why not most of us?

          As I get older, although I’m still a fan of dividend stocks for passive income, I’m investing more in ETFs. They just make so much sense and I can almost forget what the market does or doesn’t do performance-wise since I get those same returns.

          I definitely agree with you, a great ETF is one thing, saving the money to buy it is another!

          Thanks for your comment Rob.

  8. Audrey says:

    What are your thoughts on VYM.US?

    • Humm, good question Audrey.

      VYM (Vanguard’s high dividend ETF) seems like a decent product, but it only has 388 holdings compared to a few thousand stocks that VTI has. VTI has a lower MER and when I do a comparison between VTI and VYM returns, VTI comes out on top.

      https://personal.vanguard.com/us/funds/snapshot?FundId=0923&FundIntExt=INT#tab=1

      Lastly, the top-10 holdings from the site:
      (34.8% of total net assets) as of 07/31/2013
      1 Exxon Mobil Corp.
      2 Johnson & Johnson
      3 General Electric Co.
      4 Chevron Corp.
      5 Microsoft Corp.
      6 Wells Fargo & Co.
      7 Procter & Gamble Co.
      8 JPMorgan Chase & Co.
      9 Pfizer Inc.
      10 AT&T Inc.

      If you own a few of these directly, it’s almost a proxy for the ETF performance.

      Overall, I think it’s a good product but I prefer broader diversification for my portfolio.

  9. Steve Pequegnat says:

    VGK is also a great ETF from Vanguard if you are looking for exposure to the European developer market at a very low cost.

    Keep up the great work Mark!

    • Mark says:

      Interesting product, focused just on Europe. I think I prefer VEA, twice as many stocks (for Europe exposure) so you get more diversification for the same price.

      Thanks for the kind words Steve, anything you’re keeping your eye on now?

      • Steve Pequegnat says:

        Nothing to earth shattering – looking to move money from CPD (preferred share ETF) over to a bond fund ETF within my daughter’s RESP to prepare for her schooling expenses.

        The only other stocks for our registered/non-registered portfolios I am watching at this time for a good entry point, which never seems to come, are BRK.B and BLK.

        Thanks again!

  1. […] Canadian and North American assets make up more than half of the portfolio but this means other investments extend far beyond those borders.  The lesson:  diversify your investments from around the world. […]

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