First and foremost, it’s crucial to remember that the optimal investment choice should always hinge on individual factors such as your time horizon, risk tolerance, and specific financial objectives.
However, understanding the general composition of my readers’ portfolios, it’s clear that many of you have active holdings in individual Canadian stocks.
With this in mind, I want to highlight a perfect global ETF that complements a portfolio rich in Canadian stocks. This ETF offers exposure to markets outside of Canada, ensuring that your investment strategy is well-rounded and not overly concentrated in any one geographic region or market.
The addition of this global ETF to your portfolio can provide a hedge against domestic market volatility and an opportunity to capitalize on growth across various economies and sectors worldwide.
Why diversify globally?
Diversifying globally is a crucial strategy for investors, especially when considering the composition and limitations of the Canadian market.
Canada represents just about 3% of the MSCI World Index by market capitalization weight. This statistic is significant—it implies that by focusing solely on Canadian markets, investors are potentially missing out on approximately 97% of the global stock universe.
One of the key reasons to diversify globally is the sector concentration risk inherent in the Canadian market. Canada is particularly heavy in sectors like energy and financials.
While these sectors can offer substantial returns, especially in favourable economic cycles, their dominance in the Canadian market creates concentration risk. This risk becomes apparent during downturns in these specific sectors, which can disproportionately affect the overall performance of a portfolio heavily invested in the Canadian market.
On the other hand, global diversification, especially through an international ETF, provides exposure to a broader range of sectors. For instance, the U.S. market offers significant exposure to technology, communication, and consumer discretionary sectors, which have been pivotal in driving growth.
My ETF of choice
When considering an ETF for global diversification, my preference leans towards iShares Core MSCI All Country World ex Canada Index ETF (TSX:XAW).
I like XAW because it is both extremely diversified and affordable. This ETF holds over 9,000 stocks from around the world and charges a fairly competitive 0.22% expense ratio. It has over $2 billion in assets under management and is easily bought and sold like any other stock.
Because XAW excludes Canadian stocks, investors can therefore use it as the core of their portfolio, while picking and choosing their own domestic equities (and The Fool has some great suggestions below).