Dale Jackson

Personal Finance Columnist, Payback Time

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In the wake of the annual G20 summit, the Business Council of Canada is calling on Ottawa to improve trade relations with India. Stronger international trade ties are obviously good for the Canadian businesses we invest in, and they are also essential for Canadian investors looking to diversify beyond our borders.  

India, one of the largest and fastest-growing developing economies in the world, was Canada’s 10th-largest trading partner last year with exports totaling $5.56 billion. Trade between the two countries has tapered off recently due to the pandemic and a recent halt in trade talks over deep-seated political disagreements.

Trade relations are similarly in a rut with China, the other emerging economic powerhouse, which further restricts opportunities for Canadian investors looking to broaden their portfolios.

THE NEED FOR GLOBAL REACH

Canadian investors are already notorious for what is termed “home bias”: holding too much of their savings in Canadian companies. Home bias is fine in a large and diverse market like the United States, but Canadian companies account for less than three per cent of the world’s publicly traded companies. Even within that tiny sliver of opportunity, two-thirds of Canadian-listed stocks are either finance or resource related.

The right portion of foreign investments in a portfolio depends on the individual investor, but always being diversified on a global scale lowers single-sector risk and opens up a world of opportunity.     

There are low-cost ways for retail investors to get access to foreign equities but the cost of dealing in foreign currencies is a hidden risk many don’t consider.

Most foreign equity funds sold in Canada have a version that hedges the Canadian dollar at a cost much higher than the U.S. dollar version.

To avoid having to pay currency traders for an ongoing labyrinth of foreign transactions, it’s best to buy foreign equities in U.S. dollars, which is the global standard currency. That means banking up U.S. dollars in trading accounts such as a registered retirement savings plan (RRSP) and tax-free savings account (TFSA).

There are three basic ways for Canadians to invest globally. 

GLOBAL MUTUAL FUNDS

Most Canadian mutual fund providers offer a wide variety of global funds including broad global funds (all countries), international funds (all countries minus Canada and the U.S.) or funds that concentrate on specific countries, regions or global sectors like technology.

Many foreign equity funds are actively managed by investment teams with vast research capabilities and experience in the focus area. Some funds are sub-managed by firms located in the specific geographic region.    

Annual fees for that sort of reach and expertise can be two per cent to three per cent of the total amount invested, which is ultimately drawn from the total return.

GLOBAL EXCHANGE-TRADED FUNDS (ETFS)

ETFs generally have the same reach as mutual funds in terms of geographic regions and global sectors. The big difference is that they are passively managed. That means holdings are bought and sold according to a pre-set formula such as market weighting in the underlying index.

ETFs are not as effective as actively managed mutual funds at adjusting to changes or nuances relating to specific foreign markets.

On the plus side, fees on unhedged foreign ETFs are usually much lower than mutual funds, often below 0.05 per cent on the amount invested annually.

Market weighted ETFs that track an index are also more transparent. Holdings and changes mimic the underlying index while mutual fund managers are only required to provide scant information on what and how much the fund holds.  

U.S.-LISTED STOCKS

Stocks trading on overseas markets can be difficult for the average investor to access directly but most Canadian trading accounts offer full access to major U.S. exchanges.

U.S. equities are also global equities because roughly 50 per cent of all publicly traded companies in the world are based in the United States. Many generate revenue and grow earnings around the world. That not only gives investors in U.S. stocks a global reach, but it also puts the onus on the company to hedge all other foreign currencies.