The wave that has returned U.S. President Donald Trump to office has global financial markets bracing for just about anything.
Specific sectors have already reacted but the longer-term fallout from a political shift in the world’s economic engine is yet to be seen. Despite all the talk of markets and the economy during the U.S. election campaign, there’s no hard data to suggest any administration has ever had a profound impact on either.
The only certainty from the coming administration is uncertainty, however, and that’s why Canadian retirement investors should ensure their portfolios are diversified far and wide to keep growing no matter what comes.
Market moving global events already have a big impact on Canadians who invest through their registered retirement savings plans (RRSPs), tax free savings accounts (TFSAs), company pension plans and even the Canada Pension Plan (CPP), which has been growing its stake in foreign investments.
Caught between a rock and a bank
With our fortunes already so closely tied to the far-flung reaches of the globe, opting out of global financial markets is impossible for the vast majority of Canadians who need their savings to grow to reach their retirement goals.
Retreating to a basket of familiar Canadian stocks is also not an option. Canadian publicly listed equities account for less than three per cent of global equities. Two-thirds of them are directly tied to the financial and natural resource sectors, creating a concentrated risk if those two sectors falter.
Slash FOREX fees by trading greenbacks
Building an effective global investment portfolio takes time and money, but not Canadian money.
The U.S. dollar still rules the world and it’s the best ticket to the best companies in the most promising regions of the world. All major investment platforms in Canada provide U.S. dollar trading accounts, which are even permitted in RRSPs and TFSAs.
International trade involves billions of dollars in foreign currency exchange fees, which eventually trickle down to the investor. The markup on any global equity mutual or exchange traded fund (ETF) sold on the Canadian market, for example, is often close to half-percent higher annually for the Canadian dollar hedged version. Potential fees that stay invested over time can really add up.
With the Canadian dollar in the doldrums right now, the timing for building a U.S. dollar war chest right now is not good. That’s why it’s better do it over time.
The portion of a portfolio that should be designated to foreign investments depends on individual investors. A qualified advisor can help but there are three ways to get the best global reach.
1. Global and international mutual funds
Most Canadian mutual fund providers offer a wide variety of global funds including broad global funds (all countries), international funds (all countries minus Canada and the U.S.), or funds that concentrate on specific countries, regions, or global sectors like technology.
Many foreign equity funds are actively managed by investment teams with vast research capabilities and experience in the focus area. Some funds are sub-managed by firms located in the specific geographic region.
Annual fees for that sort of reach and expertise can be two per cent to three per cent of the total amount invested, which is ultimately drawn from the total return.
Mutual fund performance in relation to their benchmarks varies depending on how skillful they are managed. Do your homework.
2. Global exchange traded funds (ETFs)
ETFs generally have the same reach as mutual funds in terms of geographic regions and global sectors. The big difference is they are passively managed. That means holdings are bought and sold according to a preset formula such as market weighting in the underlying index.
ETFs are not as effective as actively managed mutual funds at adjusting to changes or nuances relating to specific foreign markets.
On the plus side, fees on unhedged foreign ETFs are usually much lower than mutual funds; often below 0.05 per cent on the amount invested annually.
Market weighted ETFs that track an index are also more transparent. Holdings and changes mimic the underlying index while mutual fund managers are only required to provide scant information on what and how much the fund holds.
3. U.S. listed stocks
All major investment platforms in Canada offer direct access to global equity markets through major U.S. stock exchanges like the S&P 500 Index, Dow Jones Industrial Average and the Nasdaq Composite.
U.S. equities also qualify as global equities because roughly 50 per cent of all publicly traded companies in the world are listed in the United States. Many generate revenue and grow earnings around the world. That not only gives investors in U.S. stocks a global reach, but it also puts the onus on the company to hedge all other foreign currencies.