Vanguard goes global with new ETFs

Fund to focus on developed & emerging markets, except Canada.

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The Vanguard Total International Stock ETF (VXUS) has long been part of my Complete Couch Potato portfolio, since it gives instant access to virtually all the world’s markets outside the United States. I’m frequently asked whether Vanguard is planning to launch a Canadian-listed version of VXUS, so investors could avoid the expense and hassle of converting their loonies to US dollars. The answer is probably no—but the solution might be even better.

Vanguard Canada announced today that it will launch five new ETFs later this year, the most interesting of which is the Vanguard FTSE All-World ex Canada. While full details have not been published yet, the preliminary prospectus explains the fund will track “the performance of a broad global equity index that focuses on developed and emerging markets, excluding Canada.” The management fee has been set at 0.25%.

This new ETF is not a Canadian wrapper for VXUS: it will include US stocks and exclude Canada, whereas VXUS does the opposite. But in many ways that’s even more convenient for Couch Potato investors who want to keep their holdings to a minimum. The fund can be combined with a Canadian equity ETF to get exposure to the whole world with just two funds instead of three or four.

The benchmark is the FTSE All-World ex Canada Index, which was newly created for this product: FTSE provided me with this hot-off-the-presses fact sheet. The index includes almost 2,900 stocks in 46 countries.

Vanguard is not able to discuss the details of the ETF because we’re in the 90-day waiting period that follows the release of the preliminary prospectus, so we can only speculate about its structure. It will almost certainly hold a combination of US-listed ETFs, but it’s not clear which ones. A blend of 50% Vanguard Large-Cap (VV), 40% Vanguard FTSE Developed Markets (VEA) and 10% Vanguard FTSE Emerging Markets (VWO) would roughly match the global market capitalization outside Canada and the number of stocks in the new index. But VV does not track a FTSE index, and I’m not sure whether Vanguard would include it in a fund pegged to a FTSE benchmark. We’ll just have to wait and see.

Global bonds here at last

Two other new ETFs are designed to add global exposure to the fixed income side of your portfolio. The Vanguard U.S. Aggregate Bond (CAD-hedged) will hold the US-listedVanguard Total Bond Market (BND), while the Vanguard Global ex-U.S. Aggregate Bond (CAD-hedged) will be a Canadian wrap for the Vanguard Total International Bond (BNDX), except that it will be hedged to the Canadian dollar instead of the greenback. Its largest holdings are in Japan, France and Germany.

These ETFs were actually announced last June, and as I wrote at the time, I don’t view foreign bonds as a core holding for the average investor. But they might be appropriate for conservative portfolios with a high allocation to fixed income: exposure to the US and international bond markets would add some diversification, since interest rates in various countries do not move in lockstep. Foreign bonds should be currency hedged, so using US-listed ETFs isn’t a good option and these new Vanguard funds plug that gap in the market. (All other foreign fixed-income ETFs in Canada cover corporate, high-yield or emerging market bonds only.)

Rounding out the list of new ETFs are the self-explanatory Vanguard FTSE Developed Europe and Vanguard FTSE Developed Asia Pacific. I don’t see either of these as a significant offering for Couch Potato investors, since you can already get both markets with a single fund. They will be useful only for investors who want to get tactical by overweighting one or the other.

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