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How to select EAFE and EM 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.

Previously we used ETF screening tools and selection criteria to select U.S., Global and Canadian Equity and Bond ETF(s). Again, our aim is to build an ETF portfolio that resembles the PIAC average Pension Plan asset allocation. Using PIAC as a reference portfolio, we next select the next largest allocation – EAFE and EM 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%

Europe Asia Far East (EAFE) equities.

Allocate ~10% (at least) to the EAFE or Europe stock markets. Index choices include the Europe Asia & Far East (EAFE) or Europe alone without the ‘Pacific’ exposure. (Include ~25% of the Global allocation).

Using the Bloomberg tool, for EAFE exposure, select USA (Listing), Equity (Asset Class), International (Objective) and MER < 0.50%. Then sort by MER. Vanguard’s MSCI EAFE ETF (VEA) provides exposure to 16 European and 5 Pacific Rim countries for 0.12%. In my opinion, other EAFE ETFs pale in comparison.

For pure Europe exposure, and again, using the Bloomberg tool, select Listing (U.S.), Asset Class (Equity), Objective (Region fund Europe). Choose from the 11 alternatives presented. Vanguard, SPDRs and / or iShares meet criteria.

Some Investors might prefer the IndexUniverse tool. For EAFE exposure, select Asset Class (Equity), Economic Development level (All), Region (Developed) and Focus (Total Market) (De-select Inverse, Leveraged, ETN’s). From the 17 alternatives presented, 9 are EAFE. Vanguard and iShares meet criteria.

Emerging Market (EM) Equities allocation.

Allocate ~10% to the EM. (Include ~15% of the Global allocation).

Using the Bloomberg ETF selection tool, select Listing (U.S.), Asset Class (Equity), Objective (Emerging Markets) and Expenses < 0.50%. Of the 6 alternatives presented, only 2 meet criteria. iShares EEM and Vanguard VWO.

Vanguard’s MSCI Emerging markets ETF (VWO) provides exposure to 913 emerging markets stocks for 0.22%.

It’s important to research and be sceptical. For example, using the TMX ETF screening tool, the Claymore Emerging Markets ETF (CWO) buys the Vanguard EM ETF (VWO) … for a 0.71% MER. Or an Investor can buy VWO themselves for MER of 0.22%.

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