I think a complete stock portfolio should, at a minimum, include exposure to different countries, different sectors, and different company sizes. That sounds obvious, but it is surprisingly difficult to achieve through individual stock picking.
Not only do you need to research dozens of companies, but you also need to constantly monitor whether your portfolio has become overly concentrated in a particular industry, geography, or market-cap segment. For most investors, that is a lot of work.
Fortunately, there is an easier solution. Exchange-traded funds (ETFs) can effectively outsource that diversification process. Instead of researching hundreds or thousands of individual companies, investors can buy a handful of broad-market ETFs that automatically provide exposure across multiple regions and sectors.
One simple combination comes from BMO Global Asset Management. By pairing three low-cost ETFs together, investors can build a globally diversified stock portfolio covering Canada, the United States, and developed international markets.
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BMO S&P 500 Index ETF
The BMO S&P 500 Index ETF (TSX: ZSP) provides exposure to 500 of the largest publicly traded companies in the United States.
The ETF uses market-cap weighting. That means larger companies receive larger allocations within the portfolio. As a result, companies like major technology firms, financial institutions, healthcare businesses, and consumer brands occupy the largest positions.
Technology tends to be the dominant sector, followed by financials, healthcare, consumer discretionary, and communication services. Because the S&P 500 represents many of America’s largest and most profitable businesses, ZSP serves as the U.S. growth engine within the portfolio.
The ETF currently offers an annualized distribution yield of 0.83% while charging an expense ratio of 0.09%.
BMO S&P/TSX 60 Index ETF
The BMO S&P/TSX 60 Index ETF (TSX: ZIU) provides exposure to Canada’s largest blue-chip companies.
Like the S&P 500, the index is market-cap weighted, meaning larger Canadian companies receive greater representation within the portfolio. The Canadian market looks very different from the U.S. market, however.
Financials and energy dominate, with meaningful exposure to pipelines, railways, telecoms, utilities, and insurance companies. That sector mix helps provide exposure to areas where Canada has historically been strong while complementing the technology-heavy nature of the U.S. market.
The ETF currently offers an annualized distribution yield of 2.1% while charging an expense ratio of 0.14%.
BMO MSCI EAFE Index ETF
The BMO MSCI EAFE Index ETF (TSX: ZEA) rounds out the portfolio by providing exposure to markets outside North America.
EAFE stands for Europe, Australasia, and the Far East. The ETF holds hundreds of companies across countries such as Japan, the United Kingdom, France, Germany, Switzerland, Australia, and the Netherlands.
Like the other two ETFs, holdings are generally weighted by market capitalization. Sector exposure is broader than many investors might expect, including industrials, financials, healthcare, consumer goods, and technology companies.
Adding international developed market stocks can help reduce dependence on any one country while providing exposure to economic growth occurring outside Canada and the United States.
The ETF currently offers an annualized distribution yield of 1.9% while charging an expense ratio of 0.22%.
