What are we looking for?
Exchange-traded funds to augment your portfolio and reduce home-country bias.
The screen
Despite the ever-growing fount of online information now available to investors, home-country bias (the overexposure to domestic stocks) still plagues many Canadians’ portfolios. During a tumultuous 2020 calendar year, this didn’t serve us well. Case in point, it took the MSCI World Index 154 days to recover from its bottom on March 23, 2020, while the S&P/TSX Composite Index took 256 days. Canadians exposed largely to domestic stocks were likely left behind last year; they also missed the general benefits of geographical diversification to reduce risk in a portfolio. To find some ideas that may help augment your portfolio, adding this much-needed diversification, I used Morningstar Direct to screen for equity ETFs that:
- Have less than 10 per cent exposure to Canadian and U.S. companies;
- A Morningstar Rating (informally known as the “star rating”) of four stars or five stars (the maximum). Recall that Morningstar’s star rating is a look back at historical risk-adjusted returns after fees, relative to peers. The star ratings are not forward-looking, but our data show that over the past decade, five-star funds domiciled in Canada were less than half as likely to be liquidated or merged than one-star funds. The star rating is a great starting point for further research.
- A Morningstar Quantitative Rating of gold, silver or bronze. This is Morningstar’s forward-looking assessment of a fund’s ability to outperform in the future. In the years that the rating has been in existence we’ve found that as a group, medalist-rated funds have outperformed neutral or negatively rated funds, after receiving their ratings.
What we found
The ETFs that meet the above requirements are listed in the accompanying table alongside their ratings, management expense ratios, inception dates and trailing performance. Note that ZEQ, RWE, ZXM and IQD are not your traditional indexed or passive ETFs. Rather, they are considered strategic beta ETFs, or those that straddle the line between passive and active by leveraging quantitative screening and ranking techniques to gain consistent exposure to a specific fundamental factor like dividends, momentum or quality.
Additionally, I’ve included the correlation of each of these ETFs to the Morningstar Canada Target Market Exposure Index (a market-float weighted index consisting of 220 Canadian companies) for the three-year period ending Jan. 31, 2020. Readers are reminded that a correlation of one would mean that the ETF moves in lockstep with the Canadian market. For diversification to happen, investors will likely want to consider ETFs with lower correlations to the domestic market. The purpose of including these dates is to show what correlation would be under “normal” market conditions, or without the effect of a global market drawdown when correlations naturally get closer to one.
This article does not constitute financial advice. It is always recommended to speak with a financial adviser or investment professional before purchasing any of the products listed here.
More about Morningstar
Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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Ian Tam, CFA