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Top International Equity ETFs for your portfolio

Over the last month or so, I’ve shared some of my favourite Exchange Traded Funds (ETFs) to consider for your portfolio.

This post included my top Canadian Dividend ETFs and this post over here captured my top Canadian Equity ETFs.

Today’s post will dive into the world of International Equity ETFs, and you’ll see things are a bit more complicated.  I’ll do my best to highlight some considerations for you.  What are the key benefits of investing in ETFs again?

  • You have the potential to own many stocks for a rock-bottom fee.
  • You get distributions (income) on a regular payment schedule from some ETF products.
  • You can ride the market returns including returns from international equity markets by investing in indexed ETFs.  This provides tremendous diversification in your portfolio, something you probably want.

On this last point, although it’s not a must investing beyond Canada’s borders makes sense.  While the Canadian market has been good to investors in recent years past performance is not always indicative of future performance.  Furthermore, it’s a BIG investment world out there.  While Canadian holdings in your portfolio are important (certainly if you plan on retiring in Canada; using Canadian money for retirement income) you should still consider diversifying your investments.  International markets will balance out your portfolio and potentially deliver some healthy returns in the process.  While financial 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. 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 my favourite International Equity ETFs below.

VTI – Vanguard Total Stock Market ETF

Straight to the point, I think the Vanguard Total Stock Market ETF is an awesome product to own.  Disclosure:  We own this product.

This U.S.-listed ETF captures over 3,600 U.S. stocks.  With this product, you need to be careful where you own it.  Without getting into too many details this ETF makes the most sense in an RRSP because I’ve learned U.S.-listed ETFs like VTI held inside an RRSP escape withholding taxes of 15%.  (Withholding taxes are a tax levied on income (interest and dividends) from securities owned by a non-resident).

Here are some more rules.   With U.S.-listed ETFs (or U.S. stocks like Coca-Cola) the Internal Revenue Service (IRS) will take a 15% withholding tax on all dividends received.  Our Canadian tax treaty with the IRS will waive the withholding taxes on U.S.-listed ETFs (and U.S. stocks) in registered accounts like:  RRSPs, Registered Retirement Income Funds (RRIFs) and Locked-In Retirement Accounts (LIRAs).   This is why I said to be careful where you own this ETF.

What about U.S. holdings in Tax Free Savings Accounts (TFSAs)?

TFSAs are not recognized by our tax treaty.  This means withholding taxes of 15% will apply to U.S.-listed ETFs and U.S. stocks in the TFSA.

There’s more to the withholding tax story so at the end of this post, I’ll link to a stellar white paper called Foreign Withholding Taxes.  It will explain more details on this subject than a) I know and b) I could write in one blogpost.

OK, back to VTI.  Why I like it:

  • holds a few thousand U.S. companies,
  • extremely diverse for a rock bottom Management Expense Ratio (MER) of 0.05%.

Ideally you’ll need to own this ETF using a U.S.-dollar RRSP since this is a U.S.-listed ETF, it pays distributions in U.S. dollars, and you’ll probably incur some pricy currency exchange fees if you don’t.  If you don’t own a U.S.-dollar RRSP then you can consider the next candidate on my list.

VUN – Vanguard Canada’s U.S. Total Market Index ETF

You don’t need a U.S.-dollar RRSP for this product since this is the Canadian version of VTI.   You’ll pay a bit more in money management fees by owing VUN but it might be worth it to avoid the currency exchange fees.   The key challenge Canadian investors will have now, with VUN, withholding taxes will apply in your RRSP or TFSA – the IRS still wants their money since you’re investing in the U.S. as a non-resident.  I recall the fees associated with owning VUN and paying the withholding taxes in registered accounts like RRSPs and TFSAs will amount to just over 0.4%.  This is still an excellent, low-cost way to invest in the U.S. stock market in my opinion.

There are many other ETFs that follow the U.S. stock market but these are my favourites.  Sure, other fund companies have great ETF products that follow the S&P 500 Index, or other indexes, but VTI and VUN are at the top of my list because they provide great diversification for a rock-bottom fee.

Beyond the U.S., here are other International Equity ETFs to consider below.

VWO – Vanguard FTSE Emerging Markets ETF

This ETF invests in stocks of companies located in emerging markets around the world, such as China, Brazil, and South Africa.  There is a high potential for returns with this product but remember with high potential returns comes high risk.  This is another U.S.-listed ETF so be careful where you own this ETF.

VEE – Vanguard Canada’s FTSE Emerging Markets Index ETF

You don’t need a U.S.-dollar RRSP for this product since this is the Canadian version of VWO.   Again, you’ll pay more in fees to own VEE over VWO but it may be worth it.  With VEE you’ll see the 15% withholding taxes applied in the RRSP and TFSA and more withholding taxes levied by the international countries where those emerging companies are considered “domiciled”.  Having fun with withholding taxes yet?

VEA – Vanguard FTSE Developed Markets ETF

This ETF invests in stocks of companies located outside North America.  Over 60% of the fund holdings are companies from Europe and almost the rest come from the Pacific region.   This is another U.S.-listed ETF so be careful where you own this ETF.

VEF – Vanguard Canada’s FTSE Developed ex North America Index ETF

Think of this as the Canadian version of VEA but hedged in Canadian-dollars to avoid foreign currency risks.  This ETF focuses on developed markets outside the U.S. and Canada.   The un-hedged Canadian version of VEF is VDU which is a newer product offered by Vanguard Canada.

VXUS – Vanguard Total International Stock ETF

This product gives investors broad exposure to major stock markets around the world, ex-United States.  Disclosure:  We own this product.  Here’s a breakdown of this U.S.-listed ETF:

  • MER = 0.14%.
  • Very diversified; holds over 5,500 companies.
  • Top-3 holdings:  Royal Dutch Shell PLC, Nestle SA, Novartis AG.

Honourable mentions for other International Equity ETFs go to:

  • XIN – iShares MSCI EAFE Index Fund (developed markets).
  • XWD – iShares MSCI World Index Fund (developed markets).
  • ZDM – BMO MSCI EAFE Hedged to CAD Index (developed markets).

Again, there are other International Equity ETFs from many other financial companies to consider but these ones above are at the top of my list.   Lastly, here is that white paper I mentioned earlier:  Foreign Withholding Taxes.  Check it out and keep it as a trusted resource like I do.

Do you own any of these products above?  What top International equity ETFs did I miss?  What are your favourites?

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

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

  1. I don’t really own any International ETFs. I have a couple of individual stocks from American companies, but that is the extent of it. You are right; investing outside of Canada does make sense. I’ll have to look more into these.

    • Mark says:

      We just own a couple international ETFs but I think it’s important to diversify beyond Canada’s borders. Canada only makes up 3-4% of the world market, not very much.

      Mark

  2. Its a tough world looking for good dividend yielding etfs outside north america. I just recently bought VEF and CYH for an income producing portfolio. Pickings were quite slim for yields abouve 3% that paid monthly. Powershares has some offerings but the liquidity of them is quite questionable. Hopefully Vangaurd will expand their income etfs as their offerings are quite minimal.

    Good Day and Grind On!

    • Mark says:

      You’re right, pickings are slim for ETF yields >3% since most broad-market ETFs (including those I listed) are focused on capital appreciation. I haven’t looked at Powershares products very much but these guys, and other companies like iShares, BMO, First Asset and more are coming out with more offerings to consider.

      I wouldn’t be surprised if Vanguard expands their menu at some point.

      Thanks for the comment!

  3. Jeffrey says:

    How would holding a US listed ETF in a Cad-dollar RRSP with conversion fees for the dividends compare to the Canadian version in a registered account with the withholding tax?

  4. gmf says:

    I’ve been following a couple income focused international ETFs: SDIV and DWX on my watch list. Both payout >5% and have been also showing capital growth. If I recall one pays monthly, the other quarterly. One is more US weighted, while the other is more international.
    My philosophy for using ETFs is twofold: a dividend ETF (Cdn or otherwise) can be a place to park some cash when you haven’t decided on specific stock investments and international ETFs (esp ones focused outside US holdings) provide exposure to markets or stocks that are more difficult to own directly. I haven’t yet pulled the trigger on either one (to my regret, in retrospect), but at some point I expect I’ll jump in, esp for the international exposure.

    • Mark says:

      I recall DWX is a good product but comes in with a higher fee and less stocks than VTI or VUN. That yield is impressive though with capital appreciation.

      I agree with the “parking” money for the most part in a CDN dividend ETF, I’ve done that. More and more though, I’m keeping any money prior to more purchases in cash. On the international exposure front, other than a few U.S. stocks I’ve decided to use ETFs for my international exposure. Just so much easier than trying to forecast the future on stocks I don’t know very well.

      Thanks for the detailed comment.

  5. Leah Little says:

    Thanks – I’m a US investor and increasing my Canadian holdings is near the top of my list for improving my portfolio so I’m checking you out!
    I appreciate the way you note the tax consequences of holding foreign dividend payers in deferred and taxable accounts – we have very similar issues with our IRAs and 401k accounts.
    Do you plan to expand once you have the basic portfolio set? I just published a new post for people who are interested in adding the growth potential of small-caps to their portfolio:
    http://www.moneydiva.com/investing-know-how-small-capitalization-growth-stocks-2/
    It’s not where I recommend investors start but it can add a substantial boost to long-term return.
    Later – Leah the MoneyDiva.com

    • Mark says:

      Thanks for checking in Leah. Canadian stocks should be high on your list, the opposite goes for me regarding U.S. stocks; I want more of them. Our TFSA and Roth IRA are very similar.

      I don’t plan to expand too much further, I would say 80% of my portfolio is set up for retirement. I will likely add a few more CDN and U.S. stocks here and there but most of my holdings have been purchased to hold for the next 10-20+ years.

      See you around the site MoneyDiva!

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