As the RRSP contribution deadline looms Monday, last-minute investors can consider putting every stock in the world in their retirement account.
Yes, we know, your income isn't quite that large. However, there are a number of funds that seek the biggest, broadest exposure to the entire global market. They're based on underlying indexes that include stocks from dozens of countries and top out at thousands of companies. They claim to capture the performance of anywhere from 85 to 99 per cent of all the world's investable markets.
And they are not, clearly, for investors who want active stock pickers who weed out names and try to pick winners.
"The argument for it is that it's probably the lowest-maintenance way you can invest across the globe," says Christopher Davis, director of research at Morningstar Canada. "That's a general argument for index investing, but here it's writ really large. It's pretty difficult to get country bets right, and these broad global benchmarks are giving you exposure to all of these markets."
Here's an example of how the indexes work: MSCI Inc. has one of the best-known collections of global stock indexes, branded with ACWI, for All Country World Index. MSCI selects from 23 developed countries and 23 emerging markets for its members. Its basic ACWI index has 2,490 stocks and claims to capture 85 per cent of global stock market performance; its ACWI Investable Market Index has 8,704 constituents and claims to cover 99 per cent of global performance. (A third index, the ACWI All-cap has a remarkable 14,561 constituents.)
While the London Stock Exchange's FTSE Russell and U.S.-based S&P Dow Jones indexes also have broad-based global indexes, not all of them have been licensed by fund providers to form the basis for exchange-traded funds or other fund products. Fewer still have Canadian-domiciled ETFs that track them.
And the funds, it must be noted, do not actually own all the stocks in the indexes because of the expense of buying and selling all those securities. For example, the U.S.-traded SPDR MSCI ACWI IMI ETF owns just 797 stocks, fewer than a 10th of the securities in the index it tracks. These funds use a sampling methodology to replicate the returns of the stocks they don't own, Mr. Davis says.
"While owning every security in the exact proportion in the index is probably the most sure-fire way to make sure the fund tracks the index, it can be so cost-prohibitive that it would undermine the benefits of investing in index funds, which are their low costs."
In addition to the SPDR fund that tracks the IMI index , there's an iShares product that tracks MSCI's basic ACWI . The two U.S.-based funds are each rated three stars by Morningstar, with management expense ratios of 0.25 and 0.33 per cent, respectively. Vanguard's Total World Stock ETF, also three-star rated, tracks the FTSE Global All Cap index and has an MER of 0.17 per cent. All three are each down about 13 per cent in the last year, reflecting the global market turmoil.
Many fund products based on these indexes take advantage of the comprehensive research behind the indexes and slice and dice, particularly by geography.
The United States, for example, makes up roughly 50 per cent of all of these indexes because of that country's dominance of global capital markets; a number of fund products leave out U.S. stocks to give investors from that country a purely international "global" investment. Other fund products exclude all the emerging-market stocks from the indexes to give investors broad exposure to the globe's developed economies.
The most popular Canadian-based ETFs that base their investments on these global indexes all have some degree of geographic exclusion, Mr. Davis notes.
The iShares MSCI World Index ETF excludes emerging markets. The fund has a four-star rating, an MER of 0.46 per cent. It's down about 3.7 per cent over the past year.
Several other funds are too new to have established the multiyear track record necessary for a Morningstar rating.
Two ETFs exclude Canadian stocks, as their names imply. Leaving out Canada, which comes in at about 2 to 3 per cent of the global markets, isn't quite the same as excluding the United States. But it can make sense for Canadian investors who often already have ample exposure to their home country.
"I have long, long lamented the extreme home bias around the world, but especially here in Canada," says John De Goey, a portfolio manager with Burgeonvest Bick Securities Ltd. "Imagine you're going to Canadian Tire and there's a sale on in the entire store, but someone tells you that you can only shop in aisle 17. … Canada is a small sliver of the total world, and if you think of yourself as a citizen of the world as opposed to a citizen of Canada, it behooves you to get more money invested in the rest of the world."
The iShares Core MSCI All Country World ex Canada Index ETF has an MER of 0.21 per cent and is down about 4 per cent over the past 12 months. The Vanguard FTSE Global All Cap ex Canada Index ETF has an MER of 0.27 per cent and is down almost 5 per cent over the past 12 months.
The Vanguard FTSE Developed All Cap ex U.S. Index ETF manages to exclude both emerging markets and the United States, giving investors exposure to developed world outside the United States. It has an MER of 0.26 per cent and is down nearly 8 per cent over the past year. Once a fund begins to toss out that many countries, however, investors who buy it aren't really achieving their goal of trying to own all the stocks in the world.
David Milstead