The article “Should this DIY investor go all in on this international ETF?” was originally published in MoneySense on May 29, 2023. Photo by Ketut Subiyanto from Pexels.
You can exclusively hold international ETFs in any Canadian account, without paying a penalty. But there are taxes and diversification to consider, too.
“I am seriously considering investing in ETFs. Is there a penalty or limit into investing solely on an international ETF such as XAW?” Michael
Exchange-traded funds (ETFs) can be a great investment tool, Michael. There are over 900 ETFs listed on the TSX right now, according to the Toronto Stock Exchange, and thousands more available to Canadian investors through other North American markets.
Many investment advisors in Canada use ETFs in their clients’ portfolios, and they have definitely become a favourite for self-directed do-it-yourself (DIY) investors. One problem with the number of choices available today is you practically need an advisor to help you pick ETFs if you’re interested in more than the vanilla options. There are sector ETFs, commodity ETFs, crypto ETFs, inverse ETFs (that rise when markets fall), leveraged ETFs (that return a multiple of the market’s performance), and so on.
Should you buy the XAW ETF?
The fund you are asking about, Michael, is iShares Core MSCI All Country World ex Canada Index ETF. It’s a pretty big ETF with net assets of nearly $1.9 billion. The investment objective is to provide “long-term capital growth by replicating the performance of the MSCI ACWI ex Canada IMI Index, net of expenses.”
Practically speaking, the ETF owns U.S., international and emerging markets stocks, with no Canadian stock exposure. It only has six holdings, but those holdings are all other iShares ETFs. The number of underlying holdings of the six ETFs is over 9,500.
So, could XAW be a one-stop ETF option for your DIY investing, Michael? It gives you access to almost the entire world in terms of geography, excluding Canadian stocks. Canada only represents 3% of global stock markets, though.
The XAW ETF is a 100% stock allocation, so it includes no fixed income or buffer for volatility. iShares offers more diversified one-ticker options, like these so-called multi-asset one-ticket solutions:
| ETF | Stocks | Bonds |
|---|---|---|
| iShares Core Equity ETF Portfolio | 100% | 0% |
| iShares Core Growth ETF Portfolio | 80% | 20% |
| iShares Core Balanced ETF Portfolio | 60% | 40% |
| iShares Core Conservative Balanced ETF Portfolio | 40% | 60% |
| iShares Core Income Balanced ETF Portfolio | 20% | 80% |
Unlinke with XAW, these ETFs include Canadian stock exposure as well as a bond allocation.
The costs of investing in international ETFs
I suspect part of your question on penalties or limits may relate to the old foreign content limits that applied to registered retirement savings plans (RRSPs) until 2005. It used to be that you could only invest 30% of your RRSP in non-Canadian content. That limit no longer applies, so there is technically nothing to prevent a Canadian investor from going “all international” in any of their accounts.
However, there’s a cost to investing in an international ETF, Michael. There’s withholding tax on non-Canadian dividends paid into a Canadian-listed ETF. It may range from 15 to 25% of the dividends earned by the fund. In a taxable non-registered account, you get credit for this withholding tax by claiming a foreign tax credit on your tax return to reduce the Canadian tax otherwise payable on the income.
Should you go “all in” on a single international ETF?
Michael, there’s nothing to prevent you from investing solely in an international stock ETF in any of your Canadian accounts. But, compared to buying a Canadian stock ETF, there may be a cost in the form of tax withheld. And by excluding Canadian stocks or bonds from your portfolio, you may be less diversified than you otherwise should be.
As a DIY investor, it’s important to understand what you are doing and why you are doing it before you invest. Saving a little on fees may be all for naught if you invest in the wrong stuff or you are a reactive investor buying and selling at the wrong time.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
