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Portfolio Strategy

The worldly investor: Funds or stocks for global investing Add to ...

You can see our experts' picks here. Let me add some of my thoughts on investing outside Canada:

Global markets rule

Canada’s stock market is built for a buoyant global economy, not the slow-growth world we live in now. The resource stocks that account for 40 per cent of the S&P/TSX composite index have been dead weight, and we’re light on sectors in favour right now like health care and consumer products. A detailed case for increasing your exposure to U.S. and global markets was made in a recent Portfolio Strategy column.

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Investors have clearly picked up on the global investing theme. The Investment Funds Institute of Canada reports that its member fund firms saw net redemptions of $428-million in Canadian equity funds in March and net purchases of $988-million in U.S., global and international equity funds.

Take a pass on currency hedging

Bank of Montreal’s economics department forecasts that while our dollar will remain near parity this year, it’s headed to 90 cents (U.S.) over the next five years. Current fluctuations are harder to anticipate than the stock markets, but it’s not hard to construct a case that there’s more downside for our currency than upside. The longer global commodity prices remain stagnant, the more pressure there is on our dollar.

The dollar has already fallen 5 per cent in the past six months as measured against the U.S. dollar. Further declines will enhance returns from U.S. equity mutual funds and exchange-traded funds if you own an unhedged version. You’ll miss out if you own funds that use hedging to muffle currency fluctuations, and you’ll often pay higher fees.

Yes, a rising dollar will cut into returns from unhedged investments. If you’re worried, keep a small amount of your U.S. investments in hedged funds.

Income investors, there’s plenty out there for you

If you prefer not to buy individual U.S. and global dividend stocks, (many are listed on the New York Stock Exchange), then consider the growing number of TSX-listed, dividend-focused U.S. and global exchange-traded funds.

The new BMO U.S. Dividend ETF (ZDY) comes in hedged and non-hedged versions and holds a portfolio of stocks chosen for their three-year dividend growth rate, yield and payout ratio. Alternatives include the iShares U.S. High Dividend Equity Index Fund (XHD) and First Asset Morningstar U.S. Dividend Target 50 Index ETF (UXM), both of which have hedging. Globally, there’s the Horizons Active Global Dividend ETF (HAZ), the iShares Global Monthly Advantaged Dividend Index Fund (CYH), and many more NYSE-listed choices.

Be careful with individual country ETFs

A recent note from investment dealer Raymond James highlights a lack of diversification in some single-country ETFs. One-third of the iShares MSCI Israel Capped ETF (EIS) is made up of Teva Pharmaceutical Industries and Israel Chemicals, both of which do little business in their home country. One-quarter of the iShares MSCI Belgium Capped ETF (EWK) is accounted for by brewer Anheuser-Busch InBev (BUD), which is Belgium-based but gets 97 per cent of revenue internationally.

Also, watch out for global ETFs based on markets with similar characteristics to resource-heavy Canada, such as Brazil. The iShares MSCI Brazil Capped ETF (EWZ) is 85 per cent correlated to the S&P/TSX composite index.

Mind the mutual fund-ETF cost differential

ETFs are much cheaper than mutual funds as a general rule, but the gap in global investing is especially huge. The average management expense ratio for the 12 largest widely available global equity mutual funds is 2.3 per cent, but several in the group have MERs in the 2.5 to 2.8 per cent range. By contrast, you can buy U.S. equity ETFs with MERs of less than 0.25 per cent and international ETFs with fees in the 0.5 per cent range.

For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).

Rob Carrick offers straight talk on investing topics of interest to both novice and savvy investors. Whether you manage your own portfolio or or you work with an adviser, the weekly Portfolio Strategy column will help make you a smarter investor. Browse the archives.

Follow on Twitter: @rcarrick

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