EAFE stocks may get a boost from improving market conditions in Europe, Japan or other developed countries. Pat explains some of the ways that investors can gain exposure to them using exchange traded funds.
One of the great appeals of Canada’s evolving ETF landscape is the choice it now offers investors seeking different strategies for gaining access to international equity markets. It’s no longer just about market cap exposure, but, increasingly, also about factor-based exposures that offer the potential for various outcomes such as reduced volatility or outperformance.
Take EAFE for example. The multi-region market consisting mostly of European, Australasia and Far East stocks may provide healthy returns going forward based on BlackRock’s positive outlook for Europe and Japan.
So how might Canadian investors gain access to the market – should they choose exchange traded funds? One option to consider is to simply “buy the market” using a low cost ETF such as the iShares Core MSCI EAFE IMI Index ETF (XEF). This fund is designed to replicate the performance of its underlying index and may be considered a long-term core holding. In April, this fund had the third highest inflows of all iShares ETFs trading in Canada, according to BlackRock’s Follow the Flow data.
This approach may not be for everyone, including those who worry about the potential for heightened volatility in places like Europe where geopolitical risks such as Brexit and government elections are ongoing concerns. In this case, minimum volatility ETFs may be an alternative worth considering. The underlying index for the iShares Edge MSCI Min Vol EAFE Index ETF (XMI) has historically lost less during market declines, while still capturing meaningful gains during upswings, according to Morningstar data.
Other investors more interested in seeking enhanced returns in EAFE, rather than potentially reducing volatility, may want to consider iShares Edge Multifactor EAFE Index ETF (XFI). This fund tracks an index designed to outperform the market benchmark over the long term while taking similar risk by focusing on four historic drivers of return: quality, value, low size and momentum.
Canadian dollar-hedged versions of these three ETFs are also available, giving investors the ability to express their currency views regardless of whether the primary objective is buying the broad market, seeking reduced volatility or outperformance.
And this isn’t just true for investors seeking exposure to EAFE. All three of these strategies are available to those seeking exposure to other global markets including Canada, the U.S., and emerging markets. So there’s choice to be had in Canada’s ETF market. It’s just up to investors to decide which strategy best suits their needs.
Pat Chiefalo is a managing director and head of iShares Canadian Product for BlackRock Canada. He is a regular contributor to The Blog in Canada.
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