Using low-cost, diversified Exchange Traded Funds (ETFs) can be a great way for investors to build wealth – including getting international exposure using international ETFs. At least that’s our approach!
We’ve written about that approach before but with so many ETFs to choose from – what are the best ones to own? Beyond that answer:
Why should you consider investing beyond Canada’s borders?
Read on and get answers to those questions and more!
So many ETFs, what are the best ETFs to own and why?
According to the Canadian ETF Association (or CETFA for short), there are now well over 1,000 ETFs to choose from. That can be a dizzying number of ETFs to sort through!
Thankfully, we’ll cut to the chase here at Cashflows & Portfolios and offer up our best international ETFs in Canada to own and why you should consider them for your wealth-building portfolio.
Before we touch on those favourite international ETFs in particular, an ETF primer for those new to our site. Not all ETFs are created equal.
When we speak of passive investing, what we are talking about here, is essentially some form of broad-market indexed ETF or some all-in-one funds. Funds that tend to “do it all” for you whether that’s all-equity investing (no bonds) or a mix of stocks and bonds.
Make sure you check out our primer about How to Start Investing for Beginners here.
That post will answer some essential questions when it comes to ETFs such as:
- How can you start investing?
- Should you buy: funds or individual stocks?
- What accounts should you start investing with?
With the rise of many, passive low-cost ETFs over the last few decades, it’s actually never been easier to build your own portfolio of ETFs and fire your financial advisor. All you need to do is open a discount brokerage account, link your bank account to set up an automatic contribution plan, purchase your ETF(s) on a routine basis – and be patient with the process over time.
To help you remain patient with the process over many investing years, at Cashflows & Portfolios, one of the founders is still investing with Questrade after 20 years! Continually one of Canada’s leading/best-of online brokerages year after year. There are several reasons why we like Questrade: i) great mobile experience, ii) great customer service, and iii) commission-free ETF investing!
- You can take advantage of our partnership with Questrade by opening an account: sign up with this link to receive a $50 trading credit!
Alternatively, you can also invest in low-cost ETFs using a Robo-Advisor. Read more below to figure out if using a Robo-Advisor might be right for you!
Not all ETFs are created equal
Your portfolio is much like a bar of soap. The more you mess with it, the smaller it’s likely to get.
At the macro level, you probably know you can be an active or passive investor. But this doesn’t mean there are not shades of grey involved.
Active investors tend to try and beat market returns. Generally speaking, they try to capitalize on market opportunities, by taking advantage of market lows, or highs – manipulating their portfolio often. Active investing is highly involved – it takes time, specialized knowledge and energy to do it well. Typically, active investors are seeking short-term profits. Traders, a form of active investing, can use various strategies to take advantage of market momentum or declines. Whether you use ETFs or individual stocks, you can be an active trader.
We think there is a better way for most Canadians to invest…
Passive investors tend to ignore market fluctuations per se and try to match market returns. Passive investors know that they have no magic crystal ball to accurately predict the future – including the short-term gyrations of the market, so they don’t even bother.
Passive investors know instead of timing their stock or fund purchases, frequently, they are better off getting invested and staying invested for years if not decades on end, in a diversified set of investments that matches their tolerance for risk along with their financial goals.
Passive investors know that through diversified investments (i.e., many companies from many sectors), that mimic an established benchmark, they are likely to obtain the returns of that benchmark by simply staying invested with time. These investors are not looking for a short-term edge because they know long-term, their wealth-building success depends on less trading, less commissions, and less active money management overall.
We think passive investing, is generally the way to go for most investors.
If you want to compare some investing approaches on our site, read on!
Regardless if you use some of our favourite, passively managed ETFs or take the almost equally lazy, dividend income investing approach by buying and holding blue-chip stocks – we believe many DIY investors must resist the urge to tinker with their portfolio. At Cashflows & Portfolios, at times over the decades, we’ve suffered (a bit) from this tinkering desire ourselves!
That’s why we believe the best way to resist that tinkering, for most investors, is to be an index investor. We own a significant amount of indexed products respectively in each of our portfolios for exactly that reason.
Indexing beyond Canada – why should you consider investing beyond Canada’s borders?
While it always feels “great to be home” that doesn’t actually bode well for Canadian investors all the time.
Home country bias happens when investors are over-exposed to domestic equities (Canada in this case) inside their investment portfolio. While you might think it’s not a problem to have “too much of a good thing” – it can be – detrimental to your overall portfolio returns. Simply put, it’s a big investing world out there. There could be some opportunity costs if you just stick to Canadian stocks.
Take a look at one of our favourite sites for long-term returns. While Canada has done overall rather well, it’s not the leader of the pack since Canada trails both S&P 500 U.S. stocks and European stocks in some long-term periods:
Source: Taxtips: https://www.taxtips.ca/stocksandbonds/investmentreturns.htm
Of course, we have no idea if long-term investing history will repeat. So, given Canada makes up less than 3% of the world’s economy – even if you live and plan to retire in Canada – there is that old adage to be mindful when it comes to risk management: avoid putting too many eggs into one basket.
By sticking too close to home, Canadians may be missing out on opportunities offered by foreign investments. History says they might be!
What are the best international ETFs in Canada to own?
Now that you’re armed with the knowledge that low-cost ETFs are generally better than higher-cost products, owning some passive investments might be better for your portfolio (than any active money management), AND, knowing that owning just Canadian stocks might have some opportunity costs, it’s time to consider some of international ETFs for your portfolio.
Here are some of our favourites including references to other blog posts later on where we have referenced them as well.
Best international ETFs in Canada:
- iShares Core MSCI EAFE IMI Index ETF (XEF) – If you already have Canadian and US exposure, then you may want some developed international market exposure. XEF uses the MSCI EAFE index to cover the largest companies outside Canada and the US.
- Vanguard FTSE Global All Cap ex-Canada Index ETF (VXC) – Vanguard’s version of XAW that covers the global stock market outside Canada (ex-Canada).
- Vanguard FTSE Developed All Cap ex North America Index ETF (VIU) – Similar to XEF, this ETF covers international developed markets.
Of course, there are many others to choose from but here are our reasons for this shortlist:
- Cost – we typically chose these ETFs above based on low fees AND diversification in mind. Fees are the best predictor of future returns, something you can control!
- Holdings – we typically chose our list above knowing you will probably already have a popular Canadian equity ETF in your portfolio like XIU, ZCN, VCN or others. You might also own a great low-cost U.S. equity ETF as well so we focused our list primarily on ex-Canada and included one ex-North America fund we like as well.
All information below is current at the time of this post – quick comparison format:
|ETF Symbol||MER||# of holdings||5-Year Return||10-Year Return|
Should you consider an all-in-one ETF for your international exposure?
The challenge with managing a portfolio of two, three, or more ETFs is the re-balancing work. Instead of that small headache a few times per year, not to mention some transaction costs, DIY investors can opt for a single asset allocation ETF (or all-in-one ETF) that combines all of your fixed income, global equities, and your international exposure into one simple fund.
Best International ETFs in Canada Summary
With over 1,000 ETFs to choose from, we know that list could be enough to make your head spin. That said, all ETFs are not created equal and we’ve done all the work here to distill some of the best international ETFs from the rest!
Although we remain passionate owners of many individual stocks, including those beloved dividend paying stocks in Canada, we’ve made major changes in our own portfolios over the years to reduce the home country bias and remove some of the opportunity costs that investing in only Canada can bring.
At Cashflows & Portfolios, we believe you can’t go wrong with any of our key ETF picks or any of the ETFs in our Diversified ETF Model Portfolio selections. As long as you:
- Have a sound financial plan, that includes investing and good risk management practices;
- You stick to that plan; and
- You focus on maintaining or ideally increasing your savings rate over time.
That’s essentially what My Own Advisor has called his “get wealthy eventually plan”. That can work for you too!
- Build Long-Term Wealth using our Diversified ETF Model Portfolios.
- ETFs and stocks built to last for your portfolio via My Own Advisor.
- The Best U.S. Dividend ETFs can be found here.
- The Best Canadian Dividend ETFs for income and growth are here.
Looking for help?
If you’ve already been investing for some time, and want to know if you’re on track to meet any long-term goals including semi-retirement or retirement, using ETFs or other investments such as real estate as part of your portfolio – we’re here to help!
If you are interested in participating in a case study, money coaching session(s), and/or obtaining private projections for your financial scenario to answer questions like “how much will I have in retirement?” and/or “how do I withdraw from my retirement accounts in the most tax-efficient manner?”, please contact us here to get started.
We are more than happy to help you out!
We look forward to sharing more great content in the coming weeks, so stay tuned!