Thanks to a growing supermarket of TSX-listed offerings, Canadian investors can now easily build a diversified portfolio of exchange-traded funds. But it's still worthwhile to do some cross-border shopping – U.S. ETFs can fill in some gaps, or help investors make bigger bets on certain themes.
For a non-registered brokerage account, buying U.S.-listed ETFs simply means setting up a U.S.-dollar version. For registered retirement savings plans, however, only some brokers offer U.S.-dollar RRSPs. If they don't provide this option, be sure to check whether they charge currency conversion fees, because that will eat away at potential returns.
We asked three analysts for their top U.S. ETF picks that can help round out a portfolio focused on Canadian-listed funds.
John Gabriel, ETF strategist at Morningstar Inc.
Vanguard Consumer Staples ETF (VDC-NYSE): Given that the Canadian equity market is concentrated on the financial, energy and materials sectors, investors might want to consider an ETF that gives exposure to U.S. consumer staples stocks, Mr. Gabriel said. The fund tracks more than 100 companies selling products that are less affected by economic downturns. Top holdings include Procter & Gamble, Coca-Cola and Wal-Mart. Many of the U.S. companies have global operations, and offer growth opportunities arising from doing business in emerging markets, he added. (52-week trading range: $99.77 (U.S.) to $116.58 a unit)
Wisdom Tree Emerging Markets SmallCap Dividend ETF (DGS-NYSE): This emerging-markets ETF has a "unique twist," Mr. Gabriel said, because it focuses on smaller companies, and should benefit from domestic growth drivers such as infrastructure spending and a rising middle class. Nearly 40 per cent of the assets are invested in Taiwan and South Korea. The dividend focus also means that many of the weaker firms are excluded, he added. "Many investors might be surprised to learn that this ETF has actually been less volatile than the MSCI Emerging Markets Index [of large- and mid-cap stocks] over the last five years." (52-week trading range: $42.10 to $49.75 a unit)
Market Vectors Oil Services ETF (OIH-NYSE): TSX-listed energy ETF offerings are available, but the focus is on Canadian companies, he said. "For those who wish to overweight the [energy] sector, OIH could be an interesting pick because it has very little holdings overlap – if any – to Canadian-listed options." This ETF, which tracks 25 U.S. oil services companies, includes names such Schlumberger, Halliburton and National Oilwell Varco. The ETF's narrow theme means "it will be more volatile compared to energy funds that hold integrated oil majors like Exxon and Chevron," he noted. (52-week trading range: $41.19 to $55.26 a unit)
Tyler Mordy, co-chief investment officer of Hahn Investment Stewards
EGShares Emerging Markets Consumer ETF (ECON-NYSE): This ETF is a play on the rising demand for consumer goods and services by a growing middle class in certain emerging markets, Mr. Mordy said. For example, "on a gross domestic product (GDP) per-capita basis, the average American was 22 times richer than the average Chinese citizen in 1978. Today, that ratio is only five times." This ETF tracks 30 firms based in developing countries. Holdings include Want Want China Holdings, a Chinese investment firm focused on the food industry, and Naspers, a South African media company. (52-week trading range: $23.52 to $ 28.52 a unit)
iShares Mortgage Real Estate Capped ETF (REM-NYSE): Yield-hungry investors might consider this real estate investment trust ETF that holds U.S. residential and commercial mortgages. "Central banks around the world show no signs of raising rates, and some may even be easing," he said. Prepaying mortgage principal ahead of schedule is certainly a risk, but that kind of trend developing is unlikely, he added. Top holdings include mortgage REIT giants Annaly Capital Management and American Capital Agency. The ETF has a dividend yield of about 15 per cent. (52-week trading range: $11.25 to $13.93 a unit)
Db X-trackers Harvest CSI 300 China A-Shares ETF (ASHR-NYSE): This ETF gives exposure to 300 of China's hard-to-access A-shares, which can be bought only by Chinese citizens and some qualified foreign institutional investors. "The Chinese stock market has been under-owned and under-loved for some time" because of share ownership restrictions, and perceived risks such as the overhang of bad debt at Chinese banks, he said. However, China's move toward a market economy and cheap stock valuations still make this ETF a compelling long-term investment, he added. (52-week trading range: $21.07 to $26.37 a unit)
Pat Chiefalo, director of ETF research and strategy at National Bank Financial
PIMCO 0-5 Year High Yield Corporate Bond ETF (HYS-NYSE): Investors searching for yield may to want to consider this U.S. short-term, high-yield debt ETF. Because it tracks 380 bonds whose duration is just less than two years, the fund is less sensitive to rising interest rates, Mr. Chiefalo said. This ETF, which is overseen by one of the world's largest bond managers, offers a yield of around 3 per cent, based on a formula mandated by the U.S. Securities and Exchange Commission. There are similar ETFs in Canada, but they involve the use of such strategies as forward agreements or credit default swaps, he noted. (52-week trading range: $100.81 to $107.23 a unit)
iShares U.S. Industrials ETF (IYJ-NYSE): This sector ETF, which provides exposure to U.S. companies that produce goods used in construction and in manufacturing, can provide further diversification for Canadian investors, Mr. Chiefalo said. Industrial stocks are a bet on a recovering U.S. economy and economic growth. Aerospace and defence stocks make up 18 per cent of the ETF, while industrial engineering companies comprise 16 per cent. The fund tracks more than 200 companies that include General Electric, United Technologies and Boeing. (52-week trading range: $80.97 to $106.24 a unit)
Vanguard Total International Bond ETF (BNDX-Nasdaq): Canadians who own domestic bonds might want to diversify their fixed-income exposure, he suggested. This ETF, which uses a hedging strategy and charges a 0.20-per-cent fee, tracks more than 2,500 non-U.S.-dollar-denominated government and corporate bonds. About 45 per cent of the assets are focused on Japan, France and Germany. The Vanguard Total Bond Market ETF [BND], which tracks more than 6,500 U.S. bonds, would also offer diversification, but a Canadian listing of this fund is in the works, he noted. (52-week trading range: $48.51 to $51.38 a unit)