Building a Global Portfolio Using ETFs
07/10/2012 4:25 pm EST
Investors who attempt to build a global portfolio using ETFs could simplify the task by slicing the global investment pie into distinct investable pieces. This will enable us to use a small number of TSX listed exchange traded funds to buy into the global investment pie.
Canadian investors will likely have most of their assets in Canada because investable assets priced in our local currency will create a home bias. Clearly exposure to Canadian equities will be an important component of a portfolio.
In order to satisfy our home bias we could buy our own TSX listed iShares S&P/TSX 60 Index Fund (XIU). The XIU gives us direct ownership of 60 Canadian large cap companies with almost one half of them being classed as commodity sensitive.
Exposure to our largest trading partner to the south would also be an important component of a portfolio. Unlike the Canadian space, which is commodity sensitive, US equities provide an investor with exposure to global growth in the technology and industrial space.
For US exposure we could add the TSX listed iShares S&P 500 Index Fund (XSP) to the portfolio which gives us direct ownership of 500 U.S. large cap companies. Investors who seek more growth could substitute the XSP for the TSX listed BMO Nasdaq 100 Equity Hedged To CDN$ (ZQQ). This will give us more exposure to the technology and health care space.
The real growth is more likely found in the emerging or youthful economies of Latin America, Eastern Europe, South East Asia, Russia, India, and China. For exposure to the emerging markets we could buy the TSX listed iShares MSCI Emerging Markets Index Fund (XEM) The XEM gives us direct exposure to China, South Korea, Brazil, Taiwan, South Africa, India, Russia, Mexico, Malaysia and Indonesia.
Some consideration could be given to the mature economies such as the United Kingdom, Germany, France and Japan but for now I suggest to pass on exposure to the group and look at some of those specialty ETFs.
Specialty ETFs can give you direct exposure to “the next big thing” such as infrastructure, water and food (AGRA). You should be careful with these products because they are volatile and sometimes “the next big thing” is a bust. The advantage of a specialty ETF is the possibility of adding alpha or a boost to your overall returns.
Some examples of specialty ETFs in the AGRA space are the TSX listed iShares Global Agriculture Index Fund (COW) and the TSX listed BMO Agriculture Commodities Index ETF (ZCA).