Expand your investment horizon

The MoneyLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

The recent squabble over the debt ceiling in Washington serves to illustrate why it’s a good idea to diversify your equity exposure by geography. Indeed, at a time when bickering between U.S. politicians threatens to shut down that country’s government, things are looking a bit brighter elsewhere in the developed world.

In Europe, the continent’s economic prospects have improved while the policies of Prime Minister Shinzo Abe of Japan have had a generally positive impact on that country’s economic activity. And despite the strong performance of the Japanese stock market year-to-date – up about 35 per cent – it’s arguable that equity valuations in both Japan and Europe are modest in comparison to those in the U.S.

Two funds to consider
Investors who want to expand their investment horizons beyond North America might consider an exchange-traded fund, or ETF, such as Vanguard FTSE Developed ex North American Markets ETF (NYSE-VEA, $41.03) or Vanguard FTSE Developed ex North American ETF (CAD-Hedged) ETF (TSX-VEF, $32.80). The former trades on the New York Stock Exchange, while the latter trades on the Toronto Stock Exchange and is hedged to fluctuations in the Canadian dollar.

Note that Vanguard has rolled out an unhedged version of this ETF on the Toronto Stock Exchange, but it’s still too small (less than $5 million in assets) for us to recommend it. So we recommend the New York ETF if you prefer an unhedged investment.
Regardless of whether they hedge or not, all three ETFs seek to track, to the extent that they can and before fees and expanses, the performance of a broad global equity index that focuses on developed markets excluding Canada and the U.S. Currently that’s the FTSE Developed ex North America Index, or the Canadian dollar-hedged version of the Index, as the case may be. Each of these indexes give you exposure to over 1,300 stocks in 23 developed markets.

Both the ETFs on the TSX invest primarily in the U.S.-domiciled ETF. The latter has a management expense ratio of 0.10 per cent.

Both Canadian versions, meanwhile, have a management fee of 0.28 per cent. That’s interesting because you currently don’t have to pay a higher fee for the hedged ETF.

That ETF, which trades under the ticker symbol VEF, has been around for less than two years. For the year ended Aug. 31, 2013, VEF had a return of 23.2 per cent. That’s a slightly better performance than the average return of all international equity funds, which was 23.1 per cent over the same period.

Over the past decade, however, VEF’s benchmark has a compound annual growth rate of 5.4 per cent versus an average return of 3.2 per cent for the international equity category.

☛ Our advice: Vanguard’s FTSE Developed ex North America Index ETFs offers a low-cost way to invest outside of North America.

The MoneyLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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