Why Canadian Investors Are Flocking to Global ETFs

These two ETFs are my favourite picks when it comes to global diversification.

Tony Dong, MSc, CETF®

Author Bio Tony turned a series of marijuana stock losses in 2017 into a self-employment venture, focused on helping retail investors build better portfolios with exchange-traded funds (ETFs). He is the founder of ETF Portfolio Blueprint and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the New York Stock Exchange. He also currently writes freelance for MoneySense, U.S. News & World Report, Kiplinger, and 24/7 Wall St., and runs an investing-focused newsletter called The Dumb Money Dispatch with 3,300+ subscribers. Outside of finance, Tony owns a small ranch in rural British Columbia, raising goats and chickens, and also volunteers as a wildland firefighter in his local community. His background includes service in the Canadian Armed Forces as a reservist and stints in corporate security. Education Master of Science (MSc) in Enterprise Risk Management, Columbia University Bachelor of Arts (BA) in Criminology, Simon Fraser University Certified ETF Advisor (CETF®), The ETF Institute Securities Industry Essentials (SIE), FINRA Canadian Securities Course (CSC), Canadian Securities Institute Areas of Expertise ETFs, mutual funds, Berkshire Hathaway, indexing, dividend stocks, royalty trusts, REITs, infrastructure, aerospace & defence, passive income investing, portfolio construction, risk management, RRSPs & TFSAs. Social Media Profiles https://www.linkedin.com/in/tzld96/ https://www.youtube.com/@okanaganhomesteader Favorite Investment Quote "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1." - Warren Buffett

Published December 12, 2023 4:00 pm EST

Remember: proper diversification can be achieved across different sectors, market capitalization sizes, and, importantly, geographies.

In particular, geographic diversification is crucial because investing only in one country’s market can be risky, as seen in the U.S. from 1999 to 2009, where investors experienced a decade of stagnation.

To avoid such scenarios and spread investment risks, global exchange-traded funds (ETFs) are becoming a popular choice among Canadian investors. They offer an efficient and cost-effective way to diversify investments across various international markets.

Here are my two personal picks for ETFs that offer quick and affordable global diversification.

The MSCI World Index

I personally like iShares MSCI World Index ETF (TSX: XWD). This ETF holds three other iShares ETFs that cover the U.S., European/Asian, and Canadian markets at around 70%, 27%, and 3% respectively, which is in line with each region’s market-cap weights.

I’m a fan of XWD because it excludes emerging markets like India, China, and Brazil, which I find too volatile and unpredictable for my risk tolerance. The small allocation to Canada at 3% is also in line with my personal belief about efficient markets — I see no reason to overweight our domestic market.

Since its inception in June 2009, the ETF has performed quite well, recording an annualized 11.39% total return (i.e., with dividends reinvested) as of November 30, 2023.

However, this ETF isn’t the best option out there, mainly because it charges a 0.48% expense ratio. While not too high, it is above comparable alternatives. For a cheaper alternative, read on for my next pick.

The MSCI All Country World ex Canada Index

A much cheaper alternative would be iShares Core MSCI All Country World ex Canada Index ETF (TSX: XAW), which charges a 0.22% expense ratio. As its name suggests, this ETF holds the entire world’s stock market minus Canadian equities.

Right now, the ETF is split around 62% U.S. stocks, 27% developed market stocks, and 11% emerging market stocks. For Canadian investors, the lack of domestic equities means you can pick which exact Canadian stocks you like to complement XAW (and The Fool has some excellent ideas below).