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portfolio strategy

One of the essential investing lessons of the past five years is that holding only Canadian stocks is a bad plan.

You need U.S. stocks, for sure. And, while the returns are volatile, you also need exposure to the world outside North America. Increasingly, exchange-traded funds make this diversification easy to get.

There are international ETFs ("international" defined as the world outside North America) for investors who already have Canada and the United States covered off, global ETFs (literally global) – with lots of U.S. content (and a bit of Canada) included, and a few global ETFs that leave Canada out of the mix.

In this fourth instalment of The Globe and Mail ETF Buyer's Guide, we look at the fast-growing selection of funds for people who understand the risks of having too much Canadian content in their portfolio.

Our market is one-third weighted to resource stocks, which have been awful in the past five years. The S&P/TSX composite index was up just 2.1 per cent annually on a total return basis for the five years to March 31 (share price change plus dividends), while the more diversified MSCI Europe Australasia Far East (EAFE) index was up 8.8 per cent in Canadian dollars and 6.7 per cent in the currencies of local countries.

The EAFE index has lagged Canada lately, but it represents about 38 per cent of the global market to Canada's 3.5 per cent.

Finally, a word about currency hedging, which cuts the distortion in returns caused by our dollar's ups and downs versus global currencies. It's useful to have hedging when the Canadian dollar is rising, but you'll find it a drag on returns when our currency is falling. ETFs that are hedged typically have the term "CAD hedged" in their name. Many funds come in both hedged and unhedged versions.

The ETF Buyer's Guide has already covered funds in the Canadian and U.S. equity categories, as well as bonds. (Still to come in the weeks ahead: Canadian dividend and diversified income ETFs, followed by U.S. and international dividend/income funds.)

Here are some explanations of the terms you'll find in the guide.

  • Assets: Shown to give you a sense of how interested other investors are in a fund; unless they’re new, the smallest funds may be candidates for delisting.
  • Management expense ratio (MER): The main cost of owning an ETF on an ongoing basis; returns are shown on an after-fee basis.
  • Trading expense ratio (TER): The cost of trading commissions racked up by the managers of an ETF as they shuffle the portfolio to keep it in line with a target index; add the TER to the MER for a fuller picture of a fund’s cost.
  • Average 30-day daily trading volume: Trading of less than 10,000 shares a day on average tells you an ETF isn’t generating much interest from investors or is still building a following.
  • Top three holdings: Some TSX-listed international and global funds have U.S.-listed ETFs as their main holding. If that’s the case, then there are implications for the withholding taxes that may apply to your dividends. See our ETF tax primer for more information.

Click here to download an excel version of the table.

*management fee only; shown for newer funds that do not yet post a full management expense ratio (MER) (management fees are a component of MER); Source: ETF company websites;

Click here to download an excel version of the table.