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Number Cruncher

International mutual funds vs. ETFs? No contest Add to ...

What we’re looking at

Thursday’s theme of Canadian equity mutual funds that beat exchange-traded funds is extended here into the international equity category.

Our screen

We started with Globeinvestor.com’s database of 56 international equity funds with a track record going back at least 10 years, including both mutual funds and ETFs but excluding segregated funds and U.S.-dollar funds. We then screened for the top performers over the decade to Sept. 30, and ranked them from best to worst. Note: International funds cover the world outside North America. Partner one with a U.S. equity fund to round out the global exposure in your portfolio.

What we found

Let’s just say you’ve got plenty of choice if you’re a mutual fund investor seeking comparable performance to index-tracking ETFs. There’s just one ETF in the international equity category with a 10-year record, the iShares MSCI EAFE Index Fund (XIN), and to call its 10-year results undistinguished would be an understatement. All kinds of mutual funds beat it over the past decade – index funds, actively managed fund, funds that used currency hedging and funds that didn’t.

XIN itself hedges its exposure to foreign currencies so that investors get the return of its underlying stocks without distortions caused by fluctuations in the value of our dollar. But you have to wonder how effective the hedging is in this case. Check out RBC International Index Currency Neutral , a hedged fund that at least stayed marginally in the black over the past 10 years. XIN lost money over that period.

Do you even need hedging for an international equity fund, where your foreign exchange risk is cut drastically because you have small bits of exposure to a multitude of different currencies? Check out the difference between the RBC index fund and TD International Index-e, which uses no hedging. It’s very small.

Note: The MSCI EAFE index that is tracked by XIN and serves as a benchmark for international equity funds is based on the Morgan Stanley Europe Australasia Far East Index.

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