Recently, I wrote about how a recent study by Morningstar on home bias in Canadian portfolios mirrored my urge to take a break from Canada and head out on an international vacation (update: Mexico is in the lead) while also influencing my suggestions for where to allocate your RRSP dollars.
To recap, the study determined that Canadians tend to have more of their investments allocated to Canadian securities than what is represented in most standard global indices. It also indicated that particularly in equity portfolios, this has hurt performance over the last 15 years.
While my previous recommendations focused on mutual funds, today I wanted to focus on ETFs. ETFs are popular vehicles in Canada for a variety of reasons, but the most prominent tends to be that they are relatively cheaper than mutual funds, on average. The average management expense ratio (MER) for an ETF in the Global Equity category sits at just 0.82% and is 0.26% cheaper than the average MER for a fee-based mutual fund in the same category which sits at 1.08%. The rise of actively managed ETFs has also fueled more interest from investors – and asset managers are obliging! Over 40% of ETFs launched in 2023 were listed as actively managed products.
How to Find the Best ETFs for Your RRSP
For those investors looking to add non-Canadian equity exposure using an ETF vehicle, I used a screen to find equity ETFs that have stood our relative to their peers with very little exposure to Canada. The criteria I considered include:
Funds must also have earned either a Bronze, Silver or Gold Morningstar Medalist Rating. These ratings are assessments of a fund’s ability to outperform peers in the future and are based on analysis of the people managing the fund, the process that they use and the parent company distributing the fund.
Funds that received a 4 or 5-star Morningstar rating. Morningstar’s Star Ratings provide context on how a fund has performed in the past relative to its category peers, on a risk-adjusted basis, after fees. It is an insightful data point as our data has suggested that funds that have earned a 5-star rating will outperform funds that have earned a 1-star rating.
Finally, I’ve only selecting funds with close to market weight exposure to Canadian equities. Market weight was determined by using the Canadian percentage allocation in the Morningstar Global Markets Index as of January 31st, 2024, which was 2.9%.
Here’s the list:
The list includes some familiar players in the passively managed space such as Vanguard, iShares and Horizons, and also two actively managed ETFs: Horizons Global Sustainability Leaders ETF ETHI and Fidelity Sustainable World ETF FCSW. The presence of ESG-oriented strategies was not an intentional criteria but their inclusion is a reminder that investors should be mindful of their investment objectives, values and overall portfolio diversification before making any new allocations to their RRSP.
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