The latest report on where exchange-traded fund investors are putting their money shows a marked preference for U.S. and international markets over Canada.
Equity funds took in $2.6-billion in May, with $1.1-billion going to the U.S. market and $1.3-billion flowing into international markets, which means stock markets outside North America. ETFs tracking the Canadian market took in just $206-million, a sign of investor disenchantment with the economic performance of this country.
Two particularly popular ETFs last month suggest an ideal compromise for investors who want to emphasize markets outside Canada while recognizing that some Canadian content still makes sense. When you invest in Canada, you avoid currency fluctuations and the potential for foreign withholding taxes on dividends, both of which can undermine returns. If you live and plan to retire in a Canadian-dollar world, it makes sense to have much of your portfolio in the same currency.
One of the more popular ETFs last month was the Vanguard All-Equity ETF Portfolio (VEQT-T), with 45 per cent of its assets in the U.S. market, 29.5 per cent in Canada, 18.5 per cent in international stocks and 7 per cent in emerging markets. Another big seller was a similar product from BlackRock – the iShares Core Equity ETF Portfolio (XEQT-T).
ETFs like these can stand in as the entire weighting in a portfolio. They’re cheap to own, with fees of 0.2 to 0.24 per cent, and you can buy them through some brokers and trading apps with no commissions.
Canadian market returns look disappointing when compared to the U.S. market, where tech stocks have helped generate annualized total returns of 14.5 per cent in the past five years. By comparison, the S&P/TSX composite made 10.1 per cent. The MSCI Europe Australasia Far East (EAFE) Index made 8.2 per cent over that period, but has come on strong lately.
If you’re dead set on marginalizing the Canadian market in your portfolio, consider an ETF like the iShares Core MSCI All Country World ex Canada Index ETF (XAW-T). This fund has almost two-thirds of its assets in the United States and the rest in markets like Japan, the United Kingdom, China, France, India, Switzerland, Taiwan and Germany. A similar option is the Vanguard FTSE Global All Cap ex Canada Index ETF (VXC-T).
With ETFs like these, you could invest a small amount in a Canadian market ETF and keep the bulk of your equity holdings outside the country. Canada represents roughly 3 per cent of the global stock market – there’s your asset allocation model if you’re truly down on the Canadian market.
Rob Carrick