Brocker.Org: Global Exposure Without Leaving Home


Like it or not, investors have biases and one of the most obvious biases is to be heavily allocated to one’s home market. What that means is investors in Canada are likely to allocate out-sized portions of their portfolios to Canadian stocks, while U.S. investors are often over-allocated to U.S. equities. The same is true in many countries throughout the world.

In previous generations, investing outside one’s home market was viewed as risky or too difficult due to a lack of information. Mutual funds helped unravel some of the mystery associated with international investing, making scores of previously hard-to-access markets more accessible to investors in markets such as Canada and the U.S.

Exchange traded funds (ETFs) have continued helping to make international markets more accessible to investors. Perhaps just as important, ETFs have also driven down the cost of investing outside your domestic market. While ETFs focusing on stocks outside of your home market are always likely to be pricier than those funds focusing on domestic equities, the growth of international ETFs is helping drive costs lower and that benefits long-term investors.

Data indicates investors are responding to the accessibility and low fees offered by many international ETFs. For example in the U.S., the world’s largest ETF market, eight of the 50 largest ETFs by assets are international equity funds. This year, several of the top asset-gathering ETFs are equity funds that feature no exposure to U.S. stocks. (For more, see also: Finding Outperforming Small-Cap ETFs.)

Investors can use the following ETFs for cost-efficient, liquid exposure to international equities.

Vanguard FTSE Developed Markets ETF (VEA)

Among developed markets ETFs trading in the U.S., only one is larger than the Vanguard FTSE Developed Markets ETF, and few, if any, are less expensive. The Vanguard FTSE Developed Markets ETF charges investors just 0.07% per year, or $7 on a $10,000 investment, making this ETF less expensive than 94% of rival funds.

VEA tracks the FTSE Developed All Cap ex US Index, which is something of a competitor to the widely followed MSCI EAFE Index. Canadian investors should note that while their home country is not found in the MSCI EAFE Index, it is part of the FTSE Developed All Cap ex US Index and VEA allocates 8.2% of its weight to Canadian stocks.

Overall, VEA features exposure to about 25 countries with Japan and the U.K. combining for 37% of the ETF’s weight. Over the past three years, VEA has topped the MSCI EAFE Index by 200 basis points while being slightly less volatile.

WisdomTree Global ex‐U.S. Quality Dividend Growth Fund (DNL)

North American investors often think that Canada and the U.S. are the premier developed market destinations for dividends. While those two countries are solid dividend stops, investors should not forget that a significant percentage of the world’s dividend-paying companies are not North American firms.

The WisdomTree Global ex‐U.S. Quality Dividend Growth Fund helps investors access foreign dividend payers. DNL is also a significant departure from rival funds that do not emphasize dividends because this fund adheres to a smart beta methodology.

DNL follows the WisdomTree Global ex-U.S. Quality Dividend Growth Index, which selects stocks based on growth and quality factors.

“The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three-year historical averages for return on equity and return on assets. Companies are weighted in the Index based on annual cash dividends paid,” according to WisdomTree.

DNL features exposure to 23 countries, including some emerging markets. In fact, eight of the ETF’s top 15 country allocations are emerging markets.

Vanguard FTSE Emerging Markets ETF (VWO)

Speaking of emerging markets, there is the Vanguard FTSE Emerging Markets ETF, the largest ETF of its kind trading in the U.S. Home to $52.7 billion in assets under management, VWO charges just 0.14% per year, making it one of the most cost-efficient emerging markets ETFs on the market. Plus, VWO has a history of fee cuts as more assets pour into the ETF, keeping it competitive with other low-cost emerging markets funds. (For more, see also: Low Fees Lure Investors to This EM ETF.)

There are some big differences between VWO and ETFs that track the MSCI Emerging Markets Index. First, VWO tracks the FTSE Emerging Markets All Cap China A Inclusion Index and that index’s provider does not consider South Korea an emerging market whereas MSCI does. Second, FTSE is moving to add, meaning VWO is doing the same, China A-shares to its emerging markets benchmarks. MSCI is still evaluating such a decision.

VWO currently devotes 28% of its weight to Chinese stocks, a number that could increase as more A-shares are added to the fund. Taiwan and India combine for 28% of VWO’s lineup.