International Investing With Exchange Traded Funds

While many Canadians prefer to invest domestically — either out of fear of the impact of a rising Canadian dollar or due to a perception of elevated risk in international equities — historically, this has not always been an ideal investment decision. According to statistics from CIBC Asset Management, Canadian and Global equities have each returned an average of 10.9% per year in Canadian dollars since 1950. The portfolio of Global equities, however, has demonstrated a lower level of volatility, as measured by the standard deviation of monthly returns. This may surprise some, but the lesson is clear: greater diversification reduces risk. Since most Canadian investors do not have sufficient knowledge or the time required to analyse and buy stocks of companies that operate on the other side of the world, many individuals purchase international mutual funds and rely on the expertise of professional money managers to actively manage this part of their portfolios. If one is a believer in passively managed approaches, due to the lower management fees, they can turn to exchange traded funds (ETFs) to provide the necessary international exposure. The increasing innovation in the world of ETFs has not left the international landscape untouched. Investors looking for passively managed baskets of international equities have many choices from which to choose.

Developed Markets
For investors that have a strong belief in the fortunes of the stock market of a specific developed nation, Barclays Global Investments offers ten ETFs that mimic the major indices of most Western European countries as well as one that tracks Japanese stocks. Investors looking for broader exposure can find regional ETFs such as the Vanguard European (VGK) or the SPDR DJ Euro Stock 50 (FEZ).

Dividend-Weighted
All of the ETFs launched by WisdomTree Investments track dividend-weighted indices, based on the belief these indices will outperform the market capitalization-weighted indices that are followed by many traditional ETFs. Funds offered include the WisdomTree DIEFA Fund (DWM)which tracks dividend-paying companies in Europe, the Far East, and Australasia. For Pacific Rim exposure, there is the WisdomTree Pacific Ex-Japan Total Dividend Fund (DND). 30% of this fund is in banks and, geographically, 57% of the fund is in Australian stocks.

Emerging Markets
Investors would be wise to exercise caution when considering emerging markets given the strong returns in recent years. Further advances may be more muted, and some markets may be due for a correction. Over the long-term, however, emerging market holdings can definitely improve overall portfolio returns, as economic growth in these regions is usually superior to that of developed nations. Claymore Investments has launched the first ETF designed to provide exposure to Brazil, Russia, India and China with its Claymore BRIC ETF (CBQ). Unlike most other international ETFs, this one is traded on the Toronto Stock Exchange. Those looking for exposure solely to China have limited options. Currently, there are no ETFs that track stocks on the red-hot Shanghai Stock Exchange. The iShares FTSE/Xinhua China 25 Index Fund (FXI) is a concentrated portfolio of 25 Hong Kong-traded stocks. Alternatively, the PowerShares Golden Dragon Halter USX China Portfolio (PGJ) is comprised of U.S.-listed companies that derive a majority of their revenue from China.

Latin America
For investors looking for Latin American Exposure, the ishares S&P Latin America 40 Index Fund(ILF) is available.

In conclusion, when it comes to international investing, you can create portfolios by regions, countries, global sectors or some combination of all these. No matter what your approach, Index Funds and ETFs can help you turn your ideas into a portfolio.