Under the Hood: Vanguard FTSE All-World ex Canada

This post is part of a series that takes a detailed look at specific Canadian ETFs or index funds.

The fund: Vanguard FTSE All-World ex Canada Index ETF (VXC)

The index: The fund tracks the FTSE All-World ex Canada Index, which includes “primarily large- and mid-capitalization stocks of companies located in developed and emerging markets, excluding Canada.” The index includes approximately 2,900 stocks in 46 countries.

The cost: The management fee is 0.25%. Since the fund is brand new we don’t know the full MER, but it should be less than 0.30% after adding taxes and incidentals.

The details: VXC started trading on July 7 and was one of five new Vanguard ETFs launched that day. The fund is a one-stop solution for those looking to diversify outside of Canada. Not so long ago, investors needed two or three ETFs to get exposure to the US, international developed markets and emerging countries (unless they were willing to buy US-listed ETFs). Now they can get it with a single fund.

VXC weights each country according to the size of its capital markets, which means the US currently makes up half the fund. The bulk of the rest is developed countries in Europe (25%) and Asia (15%). The largest international holdings are Japan and the UK at about 8% each, followed by France, Germany, Switzerland and Australia (3% to 4% each). The remaining 10% or so is emerging markets such as China, Taiwan, Brazil, India and South Africa.

The ETF gets its exposure to these markets by holding four US-listed ETFs: Vanguard Large Cap (VV),Vanguard FTSE Europe (VGK), Vanguard FTSE Pacific (VPL) and Vanguard FTSE Emerging Markets (VWO). This allows the fund to benefit from economies of scale, which help to keep the management fee low. However, if you hold the fund in an RRSP or a TFSA you will pay two levels of foreign withholding taxes on the international dividends. Based on the calculations we made in our recentwhite paper, I’d estimate foreign withholding taxes would add approximately 0.45% to the cost of the fund if it’s held in a registered account.

The fund does not use currency hedging, so investors will have exposure to the US dollar, the yen, the euro and the pound, as well as several other currencies.

The alternatives: There are no other Canadian ETFs or index funds that give you exposure to all countries outside Canada. The closest competitor is the iShares MSCI World (XWD), which holds US and developed international stocks: however, it also has a small holding in Canada and does not include emerging markets.

The only other comparable funds are US-listed ETFs such as the Vanguard Total World Stock (VT) and the iShares MSCI ACWI ETF (ACWI). Both of these ETFs include about an allocation just under 4% to Canada.

The bottom line: VXC is a useful ETF for anyone looking to wipe out home-country bias with a single holding. An investor building a small Global Couch Potato portfolio could use VXC in place of separate US and international holdings: that would reduce trading costs and complexity, as well as adding a bit more diversification with a slice of emerging markets.

For larger portfolios—especially RRSPs—using US-listed ETFs will be more tax-efficient, since the foreign withholding taxes would be much lower (the US portion is exempt and the international dividends are subject to one level of withholding taxes rather than two). But as always, that assumes you’re not getting gouged on currency conversion when you trade in US dollars. For many investors, the simplicity and convenience of VXC is likely to be a good choice even in an RRSP.

Some investors will argue there is a benefit to splitting your foreign equities into separate holdings for US and international stocks and rebalancing when outperforms the other. That’s possible, though the benefit isn’t likely to be large. There are always trade-offs when you opt for simpler solutions, but they’re usually good ones to make.

Disclosure: I do not own VXC in my own portfolio.