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How to select Global Equity ETFs.


How does an Individual Investor sort through and select from the multitude of Exchange Traded Funds (ETFs)?

ETF Screening Tools and Criteria in Practice.

Last time we used ETF screening tools and selection criteria to select Canadian Equity (and previously Bond ETF(s). Again, our aim is to build an ETF portfolio that resembles the PIAC average Pension Plan asset allocation.

Again, using PIAC as a reference portfolio, we next select the next largest allocation – Global Equities.

ASSET MIX OF PLAN AT DEC 31, 2010 PIAC Allocation ETF options include Simplified allocation
       
CASH -1.52%    
CANADIAN BONDS 26.20% XBB, XSB 30%
REAL RETURN BONDS 4.58%    
MORTGAGES 0.69%    
FOREIGN BONDS 1.76% BND  
CANADIAN EQUITIES 15.99% XIU 20%
U.S. EQUITIES 6.14% VV 10%
EAFE EQUITIES 5.84% VEA 10%
EMERGING MARKETS 3.05% VWO 10%
GLOBAL EQUITIES 12.42%  VT ACWI  
REAL ESTATE 8.86% XRE, ZRE, VNQ 10%
V.C. / PRIVATE EQUITY 7.24%    
INFRASTRUCTURE 4.15% CIF  
OTHER ASSETS 2.98% XAL 10%
HEDGE FUNDS 1.56%    

Global Equity allocation.

The argument for a Global allocation is that it negates the decision as to how much to allocate to domestic versus international markets. A Global stock would be HSBC bank, IBM, Nestle, Potash Corp., or RIM, for example. These are really multi-national corporations (MNC’s) with revenues sourced from every corner of the globe. Corporation stock performance is not limited to country specific factors. As such, they are without domicile (so to speak). Domicile is, at least, less relevant. Further, there appears to be a trade-off between sector and country valuations. For developed markets, the sector influence dominates. For Developing economies, country effects are more important. (Individual stocks are correlated more so to their local markets). Another argument is that 90% of the world is at roughly the same cost of capital making stocks more closely correlated to global sectors.

The main Global indexes include:

MSCI World index: U.S. 47%, non-U.S. 53%. No Emerging markets allocation.
MSCI ACWI (All Country World index): U.S. 42%, non-U.S. 47%. Including ~ 20% Emerging economies allocation.
FTSE All-World index: North America 47%, non-N.A. 53%. Including about a 14% Emerging market allocation.

Using the Bloomberg ETF screen tool, select USA (Listing), Equity (Asset Class), Global Equity (Objective) and MER < 0.50%. What’s left is Vanguard’s VT (the FTSE All-World index ETF).

Using the IndexUniverse ETF screening tool, select Equity (Asset Class), Economic Development (All), Region (All), Geography (Global), Category (All), Focus (Total market). What’s left are 5 ETFs. VT and ACWI included.

An opposing argument is that there are still sufficient differences between regions and countries’ economies growth and financial state that there is as much or more diversification with regional ETFs. MNC’s are in the regional indexes as well as the Global indexes, so an investor can still get exposure thru regional ETFs. As an alternative to the above Global allocation, therefore, (and for simplicity), an investor can allocate the Global allocation across regional/geographic ETFs. (My personal bias and preference).

That’s up next.

Next time?
ETF selection tools for a U.S. Equity allocation.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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