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etf strategy

Being patriotic is a widely accepted virtue, but having a heavy concentration of Canadian content in your investment portfolio is not necessarily a good thing.

Exchange-traded funds (ETFs) in international equities can help investors reduce their Canadian exposure in a global economy. They can provide stability to a portfolio, or even an advantage when other markets outperform Canada’s.

"Canada is small, with about 3 per cent of the global market capitalization. There are much bigger, sector-leading and more well-known global companies that investors should be benefiting from in terms of investment,” says Graeme Egan a financial planner and portfolio manager with CastleBay Wealth Management Inc. in Vancouver.

The Canadian equity market is also heavily weighted to mining, oil and gas, and financials such as the big six banks, he says.

We asked three financial experts to recommend ETFs that could help diversify a portfolio heavily weighted in Canadian investments.

Dan Bortolotti, associate portfolio manager, PWL Capital Inc., Toronto

The pick: iShares Core MSCI All Country World ex Canada Index ETF (XAW)

This fund offers broad, global diversification and simplicity. “It holds a number of underlying ETFs that together give exposure to all of the world’s equity markets outside of Canada in a single product,” says Mr. Bortolotti.

It is composed of nearly 57 per cent stocks from the United States, with equities from Japan, Britain, China and France making up roughly 20 per cent.

“When you say to people, ‘You can get virtually the entire global stock market in a single fund,’ they almost feel like it can’t be that easy. But if you can get your head around the fact that you don’t need to make this complicated, you can embrace that simplicity,” Mr. Bortolotti says.

The pick: Vanguard FTSE Global All Cap ex Canada Index ETF (VXC)

This one holds 10,260 stocks that attempt to replicate the relative proportions of other countries in global markets. For example, the fund is weighted with about 56 per cent U.S. stocks, which is approximately their proportion of the global market (with Canada removed from the equation).

“This is a classic all-in-one fund. It’s a little more than half U.S. stocks, plus about 35 per cent international developed stocks and nine per cent emerging markets. So it covers virtually the whole world outside Canada with one trade,” says Mr. Bortolotti.

“If you want to add global diversification, you can’t do it any easier than that,” he says.

Graeme Egan, head of CastleBay Wealth Management Inc., Vancouver

The pick: iShares Core MSCI EAFE IMI Index ETF (CAD-hedged) (XFH)

This international-index-based ETF provides exposure to more than 1,500 stocks of corporations based in Europe (66 per cent), Asia (27 per cent) and Australia (7 per cent).

It’s also hedged to the Canadian dollar to remove the added risk of currency fluctuations. Included in the ETF are global giants such as Nestle S.A. (based in Switzerland), Toyota Motor Corp. (Japan), Novartis AG (Switzerland), Unilever PLC (Britain) and Siemens AG (Germany) as well as international banks not tied to the Canadian economy.

Investors should have exposure “to all the main sectors of the regional economies including industrials, pharmaceuticals, manufacturing, telecommunications and technology, among others," he says, and this ETF provides that.

The pick: Vanguard S&P 500 Index ETF (CAD-hedged) (VSP)

This U.S.-focused ETF follows the Standard & Poor’s (S&P) 500 index. It consists of 500 of the largest U.S.-based companies, including Apple Inc., Microsoft Corp., Inc., Facebook Inc., JPMorgan Chase & Co., Exxon Mobil Corp. and Bank of America Corp., among many other well known firms.

This fund also provides some international exposure, as the majority of S&P 500 companies derive a significant percentage of their revenue from global operations, Mr. Egan notes.

U.S.-based investments offer sectors that might be scarce in Canada. “For instance, global pharmaceuticals are limited in Canada, but the sector is much bigger in the States. So that’s one advantage to participating in the U.S. economy,” he says.

James Garcelon, executive vice-president and portfolio manager, Shaunessy Investment Counsel Inc., Calgary and Toronto

The pick: BMO MSCI EAFE Index ETF (ZEA)

Mr. Garcelon is bullish on this fund for both its geographic and sectoral diversification. The acronym EAFE stands for Europe, Australasia and the Far East. “The EAFE index is the granddaddy of international investing. It basically represents the rest of the world from Canada and the United States,” he says.

The U.S. markets have been driven largely by technology stocks, he says, whereas those elsewhere are more evenly weighted across traditional industrial sectors. Moreover, international stocks are relatively cheap compared with those in the U.S., Mr. Garcelon explains.

Among the top corporate names in this fund are Nestle S.A., Royal Dutch Shell PLC and Toyota Motor Corp., notes Mr. Garcelon.

The pick: BMO MSCI Emerging Markets Index ETF (ZEM)

This ETF primarily represents Southeast Asia, minus Japan.

“We see higher growth rates in this region in terms of GDP and earnings in the next couple of decades," Mr. Garcelon says. "Particularly with China and India, there are a huge number of people moving into the middle class. They are obviously going to want to purchase consumer goods and services, so there is going to be significant growth.”

China and India are also on the verge of developing their own robust internal markets. As a result, those countries’ economies will become more stable and comparable to those of developed countries, he predicts.

That will, however, take time, "so this is not for the investor who can’t take that volatility. But we think in the long run, if you can stomach that volatility, the returns are going to be higher.”

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