What’s on your ETF wish list?

It seems like ETFs are appearing in Canada every month, but it’s been a while since I got genuinely excited about a new product. It was great to see both Vanguard and BMO create S&P 500 funds with no currency hedging: they certainly filled a gap in the marketplace. A few other recent launches have been interesting (bond barbells, preferred share ladders, low volatility), if a bit esoteric. Some just induce yawning—do we really need another dividend ETF? It makes you wonder: if you could have one ETF wish, what would you ask for?

Turns out a Canadian ETF provider is granting wishes. First Asset has just announced a contest that invites advisors to submit ideas about what’s missing in the ETF marketplace. They’ll reward the best suggestion with $10,000, which will be donated to the advisor’s favourite charity. Two runners-up will also snag $5,000 for their chosen cause.

“Launching this competition seemed like a natural thing to do as part of our search to find what’s missing in the Canadian ETF landscape,” First Asset’s president and CEO, Barry Gordon, told me in an email. “We don’t believe we’re the only people who can come up with good ideas and we hope we’ll get some great ETF concepts.”

My two cents

The contest is only open to licensed securities dealers and mutual fund reps, but I’ll offer a couple of suggestions, in case anyone is listening.

The one gaping hole in the Canadian market is a broad-based, low-cost international equity ETF that does not use currency hedging. The MSCI EAFE is arguably the most widely tracked index for developed markets outside North America: it includes Western Europe, Japan, Australia and Hong Kong. Both iShares and Vanguard have ETFs tracking this index, and BMO has one that tracks a similar Dow Jones benchmark, but all three funds use currency hedging. Since the stocks in these indexes are denominated in more than a half-dozen currencies, hedging them all seems inefficient and of dubious value.

So tops on my wish list would be an ETF equivalent of the TD International Index Fund (TDB911). It would track the MSCI EAFE or something comparable, with no currency hedging, and would hold the stocks directly rather than using an underlying US-listed ETF like iShares and Vanguard products. That would reduce the impact of foreign withholding taxes in both non-registered accounts and RRSPs.

If the ETF genie granted me a second wish, I’d ask for an international bond ETF. Since interest rates in different countries do not move in tandem, a global fixed income fund can offer some portfolio diversification. In this case, however, the fund should be hedged to Canadian dollars, since currency fluctuations would overwhelm any differences in yield. (For an excellent paper on this topic, see Vanguard’s Global fixed income: Considerations for U.S. investors. The concepts apply equally to Canadians.)

In Canada, the only product like this is the DFA Five-Year Global Fixed Income Fund (DFA231), which has large holdings in the United States, France, the Netherlands and Germany. From 2010 through 2012, the F series returned well over 5% annually, outperforming Canadian short-term bonds by a wide margin.

Vanguard recently announced plans to launch an ETF like this for US investors: the Vanguard Total International Bond Index Fund will have its largest holdings in Japan, France, Germany and the United Kingdom and will be hedged to US dollars. Allan Roth—a US adviser, indexing advocate, and blogger at CBS MoneyWatch—tweeted this week that the offering was “the first new ETF/mutual fund I’ve been excited about in two years.”

What new index ETFs would you like to see, and why? You may not be eligible to enter First Asset’s contest, but that doesn’t mean you can’t share your own wish list.