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.
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.
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.
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.
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?
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.
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.
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?