There's a kind of exchange-traded fund that belongs in almost every portfolio.
This type of ETF is a no-brainer if you're a conservative investor with just a slice of your portfolio in stocks, or a risk-loving maniac with 100 per cent in stocks. It's smart investing if you're young or old, and it's worth considering whether if you prefer stocks, mutual funds or whatever.
We're talking here about international ETFs, which cover developed stock markets outside North America. A recent Greenwich Associates study found that international diversification is the top use for ETFs among institutional investors in Canada. Retail investors should give them some thought as well as a way to enhance portfolio diversification.
For one thing, international ETFs are a highly efficient way to add exposure to markets outside Canada and the United States. Fees to own these funds have fallen in recent years to as low as 0.22 per cent or so, and you get instant diversification by tracking indexes like the MSCI Europe Australasia Far East (EAFE) Index. Many international stocks trade on the New York Stock Exchange, but it's not easy to research them.
International ETFs are also a better choice than their equivalent in the mutual fund world. The EAFE total return index in Canadian dollars has decisively beaten the average international equity fund over every timeframe measured by Globeinvestor.com. One other benefit of international ETFs is that you can buy them in hedged or unhedged versions that cost pretty much the same. Whatever your call on currency, there's an ETF for you.
Index-tracking ETFs are great for building an entire portfolio, but it has to be recognized that some investors prefer individual Canadian and U.S. stocks. Also, index investing in the Canadian market is in disrepute right now, with the energy-heavy S&P/TSX composite index pretty much were it was 10 years ago. So let's just look at international ETFs as a start. They belong in almost every investor's portfolio.
Large, liquid and cheap to own international ETFs are offered by BMO, iShares and Vanguard. To help with your research, consult this installment of my ETF Buyer's Guide.
Rob Carrick