In the past, buying all the shares that make up a stock index was a course of action available to only the largest investors. These past couple of decades, however, have seen the rise of exchange-traded funds. And with the proliferation of such funds, investors can now easily buy into an index of stocks from around the world with just a small commitment of money.
Buy the global market with this one ETF
As interest rates have ratcheted up, many investors have sold their mutual funds and bought GICs (Guaranteed Investment Certificates) for their RRSPs (Registered Retirement Saving Plan) and TFSAs (Tax-Free Savings Account).
Indeed, Royal Bank has reported that it sold $10-billion worth of GICs in its fiscal third quarter. And a good portion of this came from the $4 billion that flowed out of the bank’s stock and fixed-income funds.
These investors may regard GICs as the only viable alternative to standard equity funds, which by now they may have consigned to past experience — experience they’d rather not revisit, at least for a while.
But experience has shown that equities remain by far the most profitable asset class over the long term. For example, the annual real (after-inflation) return for U.S. stocks since 1980 is a compound annual 8.30 per cent. For 10-year treasuries (or U.S. government bonds) over the same period, it’s 4.77 per cent. And for cash, it’s 1.16 per cent.
Keep adding to your equity funds
In view of the historical long-term outperformance of equities compared with other asset classes, there’s a case to be made for holding on to — and even adding to — your equity funds right now. Besides, changing your investment strategy in a knee-jerk manner usually produces poor results. So we recommend you consider equity funds, or exchange-traded funds (ETFs) as an alternative to standard mutual funds.
When you buy Vanguard FTSE Global All Cap ex Canada Index ETF (TSX—VXC), you buy into a pool of shares based on the FTSE Global All Cap ex Canada China A Inclusion Index.
The ETF’s top holdings read like the Who’s Who of the corporate world outside Canada. You get exposure to 11,344 companies that are spread out over five world regions and eleven industry sectors. About 62 per cent of the fund’s assets are invested in the U.S. We think this substantial weighting should add stability to the fund as the U.S. economy is expected to hold up better than its European counterparts in the months to come.
An ETF with substantial exposure to the world
The ETF’s largest holdings are computer hardware company Apple Inc., software giant
Microsoft, diversified retailer Amazon.com Inc., and electric vehicle manufacturer Tesla Inc.
These companies are all domiciled in the U.S. and make up nearly 10 per cent of the portfolio.
But the fund has substantial exposure to other parts of the world too. About 15 per cent of the portfolio is invested in Europe, 11 per cent in the Pacific region, 11 per cent in emerging markets and less than one per cent in the Middle East and elsewhere.
The ETF pays an okay distribution while you wait for markets to eventually head back up.
Currently, it pays an annualized distribution of $0.85 a share, which yields 2.0 per cent. Unlike an ordinary stock fund, however, these distributions aren’t automatically reinvested inside your brokerage account. But Vanguard does offer a distribution reinvestment plan, so you can benefit from compounding. You can find enrollment information at vanguard.ca/en/investor/products/resources-group/drip.
The ETF’s MER (management expense ratio) is a low 0.21 per cent. Vanguard FTSE Global All Cap ex Canada ETF is a “buy” if you want growth and some income, have a long investment time horizon and can tolerate medium investment risk.
This is an edited version of an article that was originally published for subscribers in the October 7, 2022 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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Money Reporter •11/14/22 •