New iShares ETFs give Canadians the world

In an era when ETFs are becoming increasingly narrow and specialized, the new iShares funds launched this week were a pleasant surprise.

Granted, they were late to the game with the iShares S&P 500 (XUS), which is now the fourth ETF that tracks the S&P 500 with no currency hedging. (Vanguard, BMO and Horizons all beat them to market.) But the two international equity ETFs are a lot more interesting. In fact, the iShares MSCI EAFE IMI (XEF) and the iShares MSCI Emerging Markets IMI (XEC) are the most significant index funds to be launched in Canada in at least six months.

We are the 99%

The “IMI” in the name of the international funds stands for Investable Market Index. These MSCI benchmarks are designed to capture 99% of the equity market in a given region, including large, mid, and small cap companies. This is the same strategy used by the Vanguard Total International Stock (VXUS), a core holding in my Complete Couch Potato portfolio.

All three of the new funds simply hold an existing US-listed ETF in the iShares Core Series, launched last October. iShares describes the Core Series as “a competitively priced, diversified, tax-efficient family of ETFs that investors can use as building blocks for the heart of their portfolios.” In other words, no fringe asset classes or clever strategies: just plain vanilla, total-market index funds. The Core Series was a response to earlier price cuts by Vanguard and Charles Schwab: with expense ratios between 0.07% to 0.18%, they are the cheapest iShares products in the US.

When you combine broad diversification and rock-bottom costs you get exactly the kind of index fund you should look for when assembling a long-term portfolio. That’s what makes these new ETFs so appealing.

Best in class

Let’s start with the iShares MSCI EAFE IMI (XEF), which is notable for at least three reasons. First, the index includes more than 2,500 companies in Europe, Australasia and the Far East, compared with 950 or so in a conventional EAFE index fund. Next, its management fee of 0.30% is the lowest in its class. Finally—and most important—it does not use currency hedging, which makes it almost unique in Canada.

Meanwhile, the iShares MSCI Emerging Markets IMI (XEC) includes over 1,600 companies, primarily based in China, Korea, Brazil and Taiwan. That’s about twice as many stocks as the older iShares MSCI Emerging Markets (XEM), and with a management fee of just 0.35% the new ETF is also half the cost. Indeed, it’s even cheaper than the Vanguard FTSE Emerging Markets (VEE).

It seems clear that these are now the best international equity ETFs in Canada. Readers who don’t want to use US-listed ETFs often ask me for an alternative to VXUS, but until now there wasn’t anything remotely like it. Now you can combine these new iShares funds to get close. Emerging markets make up about 20% of VXUS, so in theory you should hold about four times more XEF than XEC. In practice, if you’re using the Complete Couch Potato, you may want to simply go with 10% XEF and 5% XEC instead of 15% VXUS. Remember, asset allocation isn’t an exact science.

iShares Canada is certainly feeling the competition these days: its market share is still over 70%, but BMO is closing the gap, and Vanguard is finally starting to gain traction. That was likely the motivation for these new ETFs. Instead of launching more and more narrow products, iShares looks ready to take back some assets by targeting buy-and-hold investors. Good on them for making that decision.