International equities

International equities are generally purchased by Canadians to provide portfolio diversification. From a Canadian standpoint, 'global' equities includes US stocks, whereas international equities are traditionally defined as all developed market equities outside North America, excluding emerging markets. US equities and emerging markets are considered in separate articles.

This article first introduces the stock indices that serve as typical benchmarks for international equities. It then looks at the two common ways to invest in such equities for Canadians: (1) through mutual funds or exchange-traded funds, which provide instant diversification and are the most popular option on the Financial Wisdom Forum; (2) by selecting individual stocks from foreign companies trading on US exchanges as American Depositary Receipts.

Benchmarks

International equities are often benchmarked against the MSCI Europe-Australia-Far East Index (EAFE Index). In September 2021, the top five countries in the index are Japan, the United Kingdom, France, Switzerland, and Germany, in order of importance. An ever broader index is the MSCI EAFE Investable Market Index, which "captures large, mid and small cap representation across Developed Markets countries around the world, excluding the US and Canada". Vanguard has transitioned to using the FTSE Global Equity Index series for its index funds and ETFs.

Mutual funds and exchange-traded funds

Mutual funds

Many actively managed Canadian mutual funds are available that allow Canadians to purchase foreign equities. Passively managed index funds are also available. A notable index fund for self-managed investors is the TD International Index Fund - e, Fund Code TDB911, MER 0.40%.

For investors using an advisor and paying them directly, TD International Index Fund - F (TDB443) is a F-series mutual fund, MER 0.29%, which holds nearly 100% TD International Equity Index ETF. There is no unhedged equivalent from RBC as of early 2024.

ETFs on Canadian exchanges, unhedged

Notable international equity ETFs trading on Canadian exchanges include:

• Vanguard FTSE Developed All Cap ex North America Index ETF (VIU)
• iShares Core MSCI EAFE IMI Index ETF (XEF)
• BMO MSCI EAFE Index ETF (ZEA)
• CAD-hedged versions are typically also available

(Note that Korea is an emerging market in the MSCI indices but a developed market in the FTSE indices, so it is included in VIU but not the other two ETFs listed above)

ETFs available on US exchanges

Notable US-listed international ETFs include:

• Vanguard FTSE Developed Markets ETF (VEA); includes an 8% allocation to Canada
• iShares Core MSCI EAFE Index ETF (IEFA)

US stock exchanges also offer regional or country-specific international ETFs. Canadians can get access to these products through their discount brokerage, but face currency conversion costs. The tax-efficiency of these US-listed products depends on various factors, see below.

See Canadian- vs US-listed ETFs for a general comparison.

Other ETF options

Many investors choose an ETF consisting only of international equities to cover this asset class. However, it is also possible to obtain this exposure in combination with other asset classes. This offers convenience, but may involve higher management fees and less control on specific allocation percentages.

Two notable global equity ETFs (which combine all ex-Canada stocks, i.e. from US, international and emerging markets) trading in Canada are:

• Vanguard FTSE Global All Cap ex Canada Index ETF (VXC)
• iShares Core MSCI All Country World ex Canada Index ETF (XAW)

According to one expert, these two ETFs have a very similar asset allocation, MER, tax-efficiency, and long-term tracking error.

Alternatively, asset allocation ETFs also offer some exposure to international stocks.

American Depositary Receipts (ADRs)

An American Depositary Receipt, or ADR, is a negotiable certificate representing shares in a non-US stock. The ADR can represent whole share of the foreign company, a fraction of a share, or multiple shares. These certificates trade in US dollars, on US stock exchanges, and allow individuals to purchase shares in non-US companies such as Toyota or Nestle without having to access overseas stock exchanges – and their clearing and settlement systems.

The largest supplier of certificates is The Bank of New York Mellon, which is also among the biggest share custodians in the world. A custodian looks after record-keeping and corporate events such as dividend payments for the owners of the shares, be they individual investors or pension or mutal funds. ADRs represent shares that are custodialized in an American bank – just like domestic shares – but they are traded much like ETFs, with market-makers buying and selling creation units to arbitrage price differences between the underlying stock price and what is bundled into an ADR.

In 2012, there were more than 2000 ADRs available, for companies based on more than 70 countries.

"Canadian Depository Reciepts" (CDRs) have recently been launched by CIBC. As of September 2021, CDRs are only availble for a few US technology stocks, so they not provide international diversification.

Tax implications

Main article: Tax-efficient investing

US-domiciled ETFs that are held in registered accounts may have tax withheld in the US. If so, this tax will not be recoverable in Canada.

Foreign holdings must be reported to CRA if they total over $100000.

Currency implications

Main article: Currency hedging

One common misconception is that owning an ETF that trades in US dollars necessarily exposes the holder to the effect of the Canadian-US dollar exchange rate. In fact, the US dollar exposure cancels out for securities that are denominated in other currencies. To see this, consider the case of a US-dollar denominated ETF or ADR that holds a security denominated in pounds sterling. For simplicity, suppose the US dollar and Canadian dollar are at parity and the exchange rate from the US dollar to the pound is exactly 2:1. A security valued at £10 would thus be worth $20 US and $20 Canadian. Suppose that the Canadian dollar and pound sterling then both depreciated by 20% versus the US dollar, with the new exchange rates being 1 GBP = $1.60 US and 1 C$ = $0.80 US. The security would now be worth only $16 US (10 × $1.60). But since the Canadian dollar would now be worth only $0.80 US dollars, the $16 US would now be $20 Canadian - and the value of the security in Canadian dollars would not have changed because the Canadian dollar to pound sterling exchange rate was unchanged.

Mathematically, the exchange rates in this case can be calculated as follows:

GBP/US$ × US$/C$ = GBP/C$

so the US dollar cancels out. Similarly, US-dollar-traded securities priced in other currencies - Euros, yen, Swiss francs, Australian dollars, etc. - will also reflect currency fluctuations only with respect to the exchange rates of the pricing currencies versus the Canadian dollar.

External links

International equity ETFS

• Canadian Portfolio Manager blog, Understanding International Equity ETFs, February 2019
• Understanding International Equity ETFs, a video from Justin Bender

Global equity ETFs

• Canadian Portfolio Manager blog, Global Equity ETFs

Taxes

• Canadian Couch Potato blog, Foreign Withholding Tax Explained
• ibid, The True Cost of Foreign Withholding Taxes