May 7, 2021
Mutual fund, ETF or U.S. stocks? How to put a strong loonie to work in your portfolio
By Dale Jackson
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As the Canadian dollar climbs to multi-year highs, opportunities have opened up for Canadian investors to get more foreign holdings in their portfolios.
Currency experts expect the loonie to remain in the 80 cent range to the U.S. dollar for several weeks or even a few months, but some warn it’s just a matter of time before it heads back down toward last year’s low of just under 70 cents.
That means more buying power to diversify beyond resource-heavy Canadian equities to the remaining 97 per cent of global equities in under-represented sectors and geographic regions.
For the average investor there are three basic ways to invest outside Canada: mutual funds, exchange-traded funds (ETFs), or U.S. listed stocks.
Foreign mutual funds
Most Canadian mutual fund providers offer unhedged U.S. dollar versions of foreign equity funds. You can invest in a broad global fund (all countries) or international fund (all countries minus Canada and the U.S.), or funds that concentrate on specific countries or 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.
Fees for the unhedged version of the fund can be up to half of a per cent less than the Canadian dollar hedged version - another good reason to trade in U.S. dollars.
Foreign exchange-traded funds
ETFs generally have the same reach as mutual funds in terms of geographic regions and global sectors. The big difference is they are passively managed. That means holdings are bought and sold according to a preset formula such as market weighting on the underlying index.
ETFs are not as effective as 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.
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 to the investor.
U.S. listed stocks
Investing in foreign markets outside the U.S. can be difficult and expensive for the average Canadian investor but full access to U.S. listed companies makes it unnecessary because the U.S. greenback is the global standard.
Roughly 50 per cent of all publicly traded companies in the world are based in the United States and many operate on a global level. 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.
Canadian investors with U.S. dollar trading accounts have the freedom to select their own holdings without annual fees to bog down returns.
How much of any Canadian investment portfolio should be allocated to foreign holdings depends on the individual investor. As a general rule Canadians should have a large portion of Canadian assets because that’s where they live and spend a great deal of their retirements. Canadians who spend a lot of time abroad should have a larger portion of their portfolios in U.S. dollar investments. It’s best to discuss your personal situation with a qualified advisor.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.
