Three new stock ETFs for greater global diversification

Transcription

1 Three new stock ETFs for greater global diversification

2 Canadian stocks account for less than 4% of publicly traded companies global market value. Investors in Canada, however, allocate 59% of their stock portfolios to domestic companies. 1 This attraction to Canadian stocks is understandable. But it leaves portfolios less diversified and more susceptible to risk than they should be. Our all-world ex-canada, developed Europe, and developed Asia Pacific stock ETFs, in conjunction with our existing stock ETFs, can help you diversify your clients portfolios at low cost, while you accommodate their preference for Canadian stocks. Contents 1 The benefits of diversification 2 Canadian investors and home bias 3 Vanguard FTSE All-World ex Canada Index ETF 4 Vanguard FTSE Developed Europe Index ETF 5 Vanguard FTSE Developed Asia Pacific Index ETF 1 Source: Holdings data as of December 31, 2012, from the International Monetary Fund Coordinated Portfolio Investment Survey. Market-capitalization data as of February 28, 2014, from FactSet.

3 The benefits of diversification Diversification is the strategy of investing in different asset classes and among the securities of many issuers in an attempt to reduce investment risk. Diversifying a portfolio can help smooth out returns over time. Outperformance in one investment can help offset underperformance in another. These benefits can apply to an entire portfolio or to an asset class within a portfolio. You can diversify a stock portfolio that holds primarily Canadian stocks by adding international and/or U.S. stocks. Global stocks provide exposure to publicly traded companies in a wide range of markets developed and emerging outside Canada. Figure 1 compares the risk and return of the global equity market with risk and returns of individual countries over more than 40 years. While Canadian stocks have provided a return similar to that of global stocks, they ve done so while taking on greater risk than a global portfolio. Figure 1: Greater risk, similar return 20% 15 Annual return 10 World Canada 5 0 0% 5% 10% 15% 20% Annual volatility 25% 30% 35% 40% Source: Vanguard illustration using Thomson Reuters Datastream return data covering December 31, 1969, through March 31, Returns reflect the MSCI World Index and respective MSCI indexes for countries in the MSCI World Index. 1

4 Canadian investors and home bias Investors in Canada tend to display what is known as home bias ; as a group, they hold a significantly higher proportion of domestic stocks than those stocks are represented in global markets. And while home bias has fallen recently from a 64% overweighting in 2001 to 55% 2 don t be surprised if your clients express discomfort with the notion of stock allocation based on global market capitalization. Investors may choose to overweight Canadian stocks for reasons that include a preference for the familiar and more favourable dividend tax treatment for investments in Canadian as opposed to foreign companies. So how much of an allocation to non-canadian stocks is appropriate? The answer may vary by client. You might find that many would consider increasing their international and U.S. allocation. One risk of not diversifying globally is concentration risk, or having too great an exposure to too few companies. This is evident in the top ten holdings of the MSCI Canada Index. As of February 28, 2014, they accounted for 35.6% of the index, nearly six times the weight of the top ten holdings in the MSCI All Country World Index. The ten largest Canadian companies comprised just 1.15% of the global index. Concentration risk is also evident in the indexes sector allocations. The Canada index is strongly overweight in the energy and financial sectors compared with the global index, while strongly underweight in information technology. Figure 2 shows the weightings of ten sectors in the Canada index compared with their weight in the global index. Figure 2: Sector biases in a Canadian stock portfolio 20% Canadian overweights Canadian underweights Consumer discretionary Consumer staples Energy Financials Health care Industrials Information technology Materials Telecom. services Utilities Source: Vanguard illustration using data from FactSet as of February 28, Canadian stocks represented by the MSCI Canada Index. Global stocks represented by the MSCI All Country World Index. 2 Source: Calculations by The Vanguard Group, Inc., using holdings data as of December 31, 2012, from the International Monetary Fund Coordinated Portfolio Investment Survey and market-capitalization data as of February 28, 2014, from FactSet. 2

5 Vanguard FTSE All-World ex Canada Index ETF VXC Our global stock ETF seeks to track the performance of the FTSE All-World ex Canada Index. VXC provides a low-cost way to invest in stocks of all countries except Canada. VXC simplifies portfolio construction by providing exposure to both emerging and developed markets through a single ETF. Lower costs With a management fee of 0.25% 3 VXC is the lowestcost global equity ETF in Canada. The fee compares with an average asset-weighted management fee of 1.95% for global stock mutual funds. 4 VXC invests in U.S.-domiciled Vanguard ETFs that create a portfolio that comes close to matching the FTSE All-World ex Canada Index. About the benchmark The FTSE All-World ex Canada Index is a marketcapitalization-weighted index of approximately 2,900 large- and mid-capitalization stocks in developed and emerging markets, excluding Canada. 3 The management fee is equal to the fee paid by the Vanguard ETF to Vanguard Investments Canada Inc. and does not include applicable taxes or other fees and expenses of the Vanguard ETF. Since this Vanguard ETF invests in another Vanguard fund, the management fee also includes any fees paid to Vanguard Investments Canada Inc. or its affiliates by such other Vanguard fund as well as certain expenses of the other Vanguard fund that are paid directly by the other Vanguard fund. At any time during which Vanguard Investments Canada Inc. is the trustee, it will receive no fee in respect of the provision of services as trustee. 4 Source: The Series A average asset-weighted management fee for global equity mutual funds based on the Canadian Investment Funds Standards Committee (CIFSC) category from Investor Economics through December 31, Vanguard and CIFSC are unaffiliated. 3

6 Vanguard FTSE Developed Europe Index ETF VE Our developed Europe ETF seeks to track the performance of the FTSE Developed Europe Index. VE offers low-cost exposure to developed markets in Europe, which account for more than 24% of global stock market capitalization. 5 VE is intended as an enduring portfolio building block. Its region-specific focus provides flexibility, so you can tilt client portfolios toward or away from the region as you and your clients see fit, while maintaining broad diversification. VE invests primarily in the U.S.-domiciled Vanguard FTSE Europe ETF, which holds stocks of companies in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. About the benchmark The FTSE Developed Europe Index is a marketcapitalization-weighted index representing the performance of large- and mid-capitalization stocks in developed economies in Europe. Lower costs With a management fee of 0.23% 6, VE is the lowestcost developed Europe ETF in Canada. The fee compares with an average asset-weighted management fee of 1.94% for developed Europe mutual funds. 7 5 Based on weighting within the FTSE All-World Index as of May 30, The management fee is equal to the fee paid by the Vanguard ETF to Vanguard Investments Canada Inc. and does not include applicable taxes or other fees and expenses of the Vanguard ETF. Since this Vanguard ETF invests in another Vanguard fund, the management fee also includes any fees paid to Vanguard Investments Canada Inc. or its affiliates by such other Vanguard fund as well as certain expenses of the other Vanguard fund that are paid directly by the other Vanguard fund. At any time during which Vanguard Investments Canada Inc. is the trustee, it will receive no fee in respect of the provision of services as trustee. 7 Source: The Series A average asset-weighted management fee for European equity mutual funds based on the Canadian Investment Funds Standards Committee (CIFSC) category from Investor Economics through December 31, Vanguard and CIFSC are unaffiliated. 4

7 Vanguard FTSE Developed Asia Pacific Index ETF VA Our developed Asia Pacific ETF seeks to track the performance of the FTSE Developed Asia Pacific Index. VA offers low-cost exposure to developed markets in the Asia Pacific region, which account for more than 14% of global stock market capitalization. 8 VA is intended as an enduring portfolio building block. Its region-specific focus provides flexibility, so you can tilt client portfolios toward or away from the region as you and your clients see fit, while maintaining broad diversification. About the benchmarks The FTSE Developed Asia Pacific Index is a marketcapitalization-weighted index representing the performance of large- and mid-capitalization stocks in developed economies in the Asia Pacific. Lower costs With a management fee of 0.23% 9, VA is among the lowest-cost options in the Asia Pacific stock fund marketplace. The fee compares with an average asset-weighted management fee of 1.85% for developed Asia Pacific funds. 10 VA invests primarily in the U.S.-domiciled Vanguard FTSE Pacific ETF, which holds stocks of companies in Australia, Hong Kong, Japan, New Zealand, Singapore and South Korea. 8 Based on weighting within the FTSE All-World Index as of May 30, The management fee is equal to the fee paid by the Vanguard ETF to Vanguard Investments Canada Inc. and does not include applicable taxes or other fees and expenses of the Vanguard ETF. Since this Vanguard ETF invests in another Vanguard fund, the management fee also includes any fees paid to Vanguard Investments Canada Inc. or its affiliates by such other Vanguard fund as well as certain expenses of the other Vanguard fund that are paid directly by the other Vanguard fund. At any time during which Vanguard Investments Canada Inc. is the trustee, it will receive no fee in respect of the provision of services as trustee. 10 Source: The Series A average asset-weighted management fee for Asia Pacific equity mutual funds based on the Canadian Investment Funds Standards Committee (CIFSC) category from Investor Economics through December 31, Vanguard and CIFSC are unaffiliated. 5

8 Vanguard Investments Canada Inc. 155 Wellington Street West Suite 3720 Toronto, ON M5V 3H1 Connect with Vanguard vanguardcanada.ca/advisorsalpha Investors will usually pay brokerage fees to their dealer if they purchase or sell units of ETFs on Toronto Stock Exchange (TSX). If the units are purchased or sold on TSX, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current NAV when selling them. ETFs are priced continuously and bought and sold throughout the day in the secondary market, which entails paying additional costs such as bid/ask spreads. There are ongoing fees and expenses associated with owning units of an ETF. An ETF must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the Vanguard ETFs in these documents at ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Vanguard ETFs are managed by Vanguard Investments Canada Inc. a wholly-owned indirect subsidiary of The Vanguard Group, Inc. Date of first publication: July This communication is solely for informational purposes, and is not a recommendation, offer or solicitation to buy or sell any ETFs or to adopt any investment or portfolio strategy. The information is not investment and/or tax advice, nor is it tailored to the needs or circumstances of any individual investor. All investing is subject to risk, including the possible loss of the money you invest. Investments in stocks issued by companies outside Canada are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in Canadian dollars, will decrease because of unfavourable changes in currency exchange rates. Foreign investing risks are especially high in emerging markets. In a diversified portfolio, gains from some investments may help offset losses from others. However, diversification does not ensure a profit or protect against a loss. All rights in the FTSE All-World ex Canada Index, the FTSE Developed Europe Index and the FTSE Developed Asia Pacific Index (the Indexes ) vest in FTSE International Limited ( FTSE ). FTSE is a trademark of London Stock Exchange Group companies and is used by FTSE under license. Vanguard FTSE All-World ex Canada Index ETF, Vanguard FTSE Developed Europe Index ETF and Vanguard FTSE Developed Asia Pacific Index ETF (the Products ) have been developed solely by Vanguard. The Indexes are calculated by FTSE or its agent. FTSE and its licensors are not connected to and do not sponsor, advise, recommend, endorse or promote the Products and do not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Indexes or (b) investment in or operation of the Products. FTSE makes no claim, prediction, warranty or representation either as to the results to be obtained from the Products or the suitability of the Indexes for the purpose to which they are being put by Vanguard Vanguard Investments Canada Inc. All rights reserved. GGDEQ