What we’re looking for
Global equity ETFs to augment your portfolio and reduce home-country bias.
Like most other developed countries, Canadian retail investors have a tendency toward home-country bias, resulting in an overexposure to domestic equities. To our detriment, this bias has hurt investors during the course of the pandemic largely due to our market’s exposure to depressed energy prices.
Case in point, as of Monday’s close, the S&P/TSX Composite (Total Return) index is about 6 per cent off from its prepandemic highs of late February, while the S&P 500 index has fully recovered as of last Thursday and the Morningstar Global TME Index (which consists of roughly 3,000 global companies) is about 1-per-cent shy. A practical way for investors to reduce this bias is to consider global equity ETFs, which grant broad market exposure at a relatively low cost. To find some suitable choices, I used Morningstar Direct to look for Canadian-domiciled global equity ETFs that:
- Have received a Morningstar Rating Overall greater than four stars. Recall that the Morningstar Rating Overall is a backward-looking assessment of risk-adjusted fund returns after fees relative to peers. Investors are best to interpret this as a report card of how the fund has performed – a great starting point for further research.
- Have received a Morningstar Quantitative Rating or Morningstar Analyst rating of gold, silver or bronze. The medalist ratings are Morningstar’s forward-looking assessment of a fund’s prospective ability to outperform similar funds after fees, based on five pillars: people (the quality of the management team); process (the effectiveness and consistency of the investment process); parent (organizational structure and talent retention); performance; and price (fees). Over the long term, gold, silver and bronze funds are expected to outperform neutral and negative funds after fees.
To qualify, funds must meet both criteria.
What we found
The ETFs that meet the above requirements are listed in the table along with their associated fees, ratings, number of holdings and trailing performance.
It is important to note that while the TSX-listed funds XWD, VXC and XAW are traditional index ETFs, all others that meet the requirements are either actively managed or strategic beta ETFs (those that are a hybrid of active and passive investing strategies).
DXG and HAZ, which are both actively managed funds, hold portfolios that are concentrated in a much narrower range of stocks. As such, it would be worthwhile to have a look into the holdings of the fund to ensure that the positions do not overwhelmingly overlap with your existing portfolio if your intent is to diversify.
This article does not constitute financial advice. It is always recommended to speak to a financial adviser or professional before investing.
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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