The Complete Guide to International ETFs for Canadians

0:00 Everyone loves the S&P 500 and honestly, it's been amazing. If you bought and held over the last 15 years, you've crushed it and I love it, too. And markets rotate, though. USO performance is not permanent. There's been entire decades where the S&P 500 went nowhere and international stocks doubled. Right now, international is really cheap, like historically cheap. The valuation gap is wider than it's ever been in decades. And every major institution, Vanguard, Black Rockck, Goldman, Morning Star, is forecasting International to outperform over the next 10 years. So, I went deep on this, pulled the research, looked at what sophisticated investors are actually doing, figured out what actually makes sense, specifically for Canadians. I'm Brian, CPA over 15 years in finance. I found three mistakes most Canadians investors make with their international allocation. Some cost real money every year. Some expose you to risks you don't even know you're taking.

0:49 Let's get into it. First mistake. I'm guilty of this too in the past and thinking I was diversified because I own the S&P 500. 500 companies, all sectors, biggest economy in the world. Sounds pretty diversified to me. Here's what actually is going on though is a concentration problem. The mag 7, Apple, Microsoft, Nvidia, Amazon, Google, Meta, Tesla make up almost 35% of the S&P 500. Top 10 stocks are 39%. That's more concentrated than.com peak. I'm not saying we're in a bubble, but you're not really buying 500 companies. You're making a big bet on some tech companies.

1:25 The valuation problem, there's a metric called cape ratio. It smooths out earnings over 10 years to show how expensive a market is. US Cape right now is about 40, second highest ever, only higher in 1999, right before the dot crash. International developed, Japan, Europe, UK, Australia, Cape of 18 to 25. Emerging markets like China, India, Taiwan, Korea capes around 15, nearly half the valuation. The history is relevant. From 2000 to 2010, S&P returned negative 24% over 10 years.

1:56 Emerging markets in that same period of time, positive 98%. The people who were 100% US lost an entire decade. The people with international diversification did fine. We're now 14.6 years into the current cycle of US outperformance and dominance. Historical average is about eight. What institutions are forecasting Vanguard US 2.8 to 4.8% annually over the next decade international 6.9 to 8.9%. Places like GMO the last guys who called 2000 and 2008 are forecasting negative returns for the US large caps. Morning Star US 5.6% international 9 to 11%.

2:34 Every major forecaster sees the same valuation gap. Bottom line is if you're 100% US, just understand the bet you're making. Most concentrated index in decades, highest valuations in history might keep working. Who knows? But it's a bet. It's not a guarantee. Second mistake is a little bit more nuanced. A lot of Canadians here diversify internationally and buy XEF for developed markets or ZM for emerging markets and, you know, done. But honestly, that's a solid approach.

3:04 Lowcost, broadly diversified. It's simple, but you might not understand what you actually own. And there are some risks hiding in these funds. Inside XEF, it holds about 2,600 stocks across developed markets outside North America. Japan 23 to 24%, UK 16%, France 10, Australia 8, Germany 8. So, you're mostly buying Japan and Europe. Good to know what's happening there. So, Japan and the Buffett trade. So, for 34 years, Japanese stocks went nowhere. The Nikki hit its high in 1989 and didn't recover until 2024. Why is that? Japan company's hoardy ignored shareholders, terrible governance. It's changing. The Tokyo Stock Exchange started publicly shaming companies trading below book value.

3:47 Basically saying, "Your stock is worth less than the cash on your balance sheet. Fix it." And it worked. There was record buybacks last year, dividends increasing. Buffett saw this coming. He's put 23.5 bill into Japanese trading companies, borrowed yen at.5%, bought stocks yielding 3 to 4%, pocketing the spread plus equity upside. When you see Buffett put that level of capital behind a trade, it's worth paying attention for targeted Japanese exposure. EWJ is unhedged. You're betting on both stocks and yen. DXJ is currency hedged, both US lusted, best in our RSP. Europe, defense and infrastructure. So, two things happening in Europe. There's defense stocks are up 60 to 70% this year. BAE Systems, Ryan Metal, order books full for years. Multi-year structural shift as Europe rearms. Germany announced a $500 billion euro infrastructure fund.

4:38 Biggest fiscal shift in decades. Energy, rail, and digital. UK, it's easy to pick on, but it's trading at 11 times earning. A 35% discount to global markets. Postrexit. Capital left never came back. Companies didn't get worse, just got cheaper. for Rolls-Royce, for instance, is up over 500% since it's low. Shallon BP trade about 30% cheaper than Exxon and Chevron just because of where they're listed. VGK for Broad Europe at 009% ME, EWU, or FGB for UK.

5:09 Quick note, Australia is a critical minerals play. The West is reducing dependence on China for rare earths, lithium, copper. Australia's positioning as the alternative. Lennis rare metals largest producer outside China up 80% in six months EWA for exposure the emerging markets reality so now emerging markets this is where it gets more complicated and when you buy ZM or any broad-based EM fund you have China 25 to 30% Taiwan 18% India 18 Korea 12 four countries 75% of the index very different stories India might be the most compelling long-term growth story 1.4 four bill people median age 28 China is 38 US is 38 decades of workforce growth while everyone else ages Goldman forecast 18 to 20% of annual earnings growth over 5 years making make in India is working and electronics production is up 146% the bare cases it's expensive capes around 35 growth already priced in NDA is the most liquid LIN is a little bit cheaper So in China, and the risk no one explains, and it's important, is when you buy Chinese stocks directly or through an ETF, you don't actually own the company. You own shares in a shell company in the Cayman Islands, that shell company has contracts with the actual Chinese businesses. It's called a VIE structure. Why? Because China law restricts foreign ownership. So this workaround was created. So there's risk with that. If China ever chooses to enforce, foreign shareholders could lose out. This isn't theoretical. It's structural risk in every Chinese stock foreigners can buy. Add the property crisis, record bad loans, deflation concerns. It's very complicated. The bull case is it's cheap. The cape is around 10. And if this concerns you, EMXC is emerging markets exchina removes China gives you India, Taiwan, Korea, Brazil for 0.25 me increasingly popular.

7:08 If you believe in AI, you need to understand South Korea and Taiwan and TSMC in Taiwan. 67% market share in advanced chips. Every Nvidia, Apple, AMD chip, over 90% of the most advanced semiconductors come from this one island. SKH Highix in Korea's 50% of high bandwidth memory, which is what AI systems need. The risk is obvious though. Taiwan's 100 miles from China. EWT for Taiwan, but it's 50% TSMC. It's not diversified. Concentrated bet. America's quick few notes. Mexico is now one of America's number one import suppliers. Past China. Nearshoring is real. EW. Brazil is a commodity superpower. Soybeans, coffee, beef, iron, ore, oil. Volatile, but it's hard to replicate. EWZ. And then Chile, 25% of global copper, 27% of global lithium.

7:56 Every EV battery needs those. EC. Vietnam is a China plus one story. So Apple's moving manufacturing there. VNM. Another thing is XEF and ZM are market cap weighted. You own mostly the giants. Academic research shows factors outperform over long periods. Smaller companies beat large. Cheap beats expensive. Profitable beats unprofitable. AVDV Avantis international small cap value. It targets smaller companies that are profitable and undervalued, not the giants, the overlooked and morning star rates at gold. Massive inst institutional inflows. Avees does the same thing for emerging markets. The catch is factor premiums show up over decades. not months. It requires a lot of patience. US-listed, so best in RSP.

8:45 That's the edge if you want to level up a little bit. Third mistake costs Canadians real money every year and almost nobody talks about it. If you're holding US listed international ETFs in your TFSA, you're losing some money and you'll never get it back. Canada and the US have a tax treaty. Certain retirement accounts are exempt from US withholding taxes. The TFSA sadly not one of them. So, US listed ETF in your TFSA, like VA, whatever you have, the IRS takes 15% of your dividends before you get to see them. You can't get it back. No foreign tax credit in the TFSA because you don't pay Canadian tax on the gains. So, the math, 100K in VA, 2% yield, 2,000 in dividends. IRS takes $300 gone every year. Over 20 years, thousands of dollars lost to completely avoidable tax. A fix could be Canadian listed ETFs that hold stocks directly and XEF holds the actual companies. So Toyota, Nestle, Shell, no US, no US middleman, no US withholding. Same with VIU for developed ZM for emerging. How do you check? You have to look at the holdings. If your Canadian ETF holds another ETF underneath, especially US listed, you're paying extra tax. XEF holds direct good.

9:55 VE holds VWO underneath. It's an extra layer. Avoid it in your TFSA if you can. The treaty doesn't apply to RRSPs, so you're exempt from US withholding. This is where US listed ETFs make the most sense and they're cheaper. VA is 0.05%. XEF is 22%. It's $170 per year in fees alone, plus a recovered holding. All the single country ETFs are US listed, best in RSP. Factory ETFs like AVDV are US listed, best in RSP as well.

10:27 One thing to consider too is if your total cost of specified foreign property, US stocks, and US ETFs combined exceed 100K, you file a form T1135. Not hard. Don't forget it. Canadian listed ETFs don't count for that. even though they hold foreign stocks. So, it's good to take a look at the cheat sheet of TFSA, Canadian listed, to hold direct, and your RSP, USlisted, and lower fees to hold what to hold there. The framework. So, there's three levels. Let's look at level one could be keep it really simple. XEQT 30% international built-in. Truly, it's fine for most people. it really is that simple. Level two could be controlling your allocation. So, TFSA gets XEF plus ZM or RSP gets Va plus VWO. You pick the percentages. Level three could be something like a factor tilt with adding conviction like AV DV in the RRSP. Pick a couple single country positions based on what you believe. If China concerns you, swap VWO for EMXC. Three common mistakes again to recap. One is thinking you're diversified with the S&P 500.

11:30 Seven tech stocks, highest valuations in history. Two is buying international without understanding what's inside. Real opportunities in Japan, Europe, India, real risks in China that nobody explains. Three is putting US listed ETFs in your TFSA. 15% tax you'll never recover. Fixes simple Canadian funds and TFSA. US funds and RSP. match the right ETF to the right account. Understanding what you own and how to structure it, that's a true edge. Please don't let me or anyone else online influence you if your portfolio is actually working.

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