Should this DIY investor go all in on this international ETF? – MoneySense

Many investment advisors in Canada use ETFs in their clients’ portfolios, and they have definitely become a favourite for self-directed do-it-yourself (DIY) investors. One problem with the number of choices available today is you practically need an advisor to help you pick ETFs if you’re interested in more than the vanilla options. There are sector ETFs, commodity ETFs, crypto ETFs, inverse ETFs (that rise when markets fall), leveraged ETFs (that return a multiple of the market’s performance), and so on.

Should you buy the XAW ETF?

The fund you are asking about, Michael, is iShares Core MSCI All Country World ex Canada Index ETF. It’s a pretty big ETF with net assets of nearly $1.9 billion. The investment objective is to provide “long-term capital growth by replicating the performance of the MSCI ACWI ex Canada IMI Index, net of expenses.”

Practically speaking, the ETF owns U.S., international and emerging markets stocks, with no Canadian stock exposure. It only has six holdings, but those holdings are all other iShares ETFs. The number of underlying holdings of the six ETFs is over 9,500.

So, could XAW be a one-stop ETF option for your DIY investing, Michael? It gives you access to almost the entire world in terms of geography, excluding Canadian stocks. Canada only represents 3% of global stock markets, though.

The XAW ETF is a 100% stock allocation, so it includes no fixed income or buffer for volatility. iShares offers more diversified one-ticker options, like these so-called multi-asset one-ticket solutions:

Unlinke with XAW, these ETFs include Canadian stock exposure as well as a bond allocation.

The costs of investing in international ETFs

I suspect part of your question on penalties or limits may relate to the old foreign content limits that applied to registered retirement savings plans (RRSPs) until 2005. It used to be that you could only invest 30% of your RRSP in non-Canadian content. That limit no longer applies, so there is technically nothing to prevent a Canadian investor from going “all international” in any of their accounts.

However, there’s a cost to investing in an international ETF, Michael. There’s withholding tax on non-Canadian dividends paid into a Canadian-listed ETF. It may range from 15 to 25% of the dividends earned by the fund. In a taxable non-registered account, you get credit for this withholding tax by claiming a foreign tax credit on your tax return to reduce the Canadian tax otherwise payable on the income.