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The ETF Lab
ETF Spotlight: International Equity Investing with ETFs
The outperformance of US equities, more specifically the vaunted ‘Magnificent Seven’, has been well documented. However, International equities, particularly European and Japanese stocks, have held their own over the past year.
Source: Bloomberg; as of December 31, 2023.
This week, we’re looking at International equity ETFs and why investors may want to consider diversifying their portfolio beyond US and Canadian stocks in 2024.
Outlook for International (Developed Market) Stocks
As shown in the chart above, International Equity ETFs (hedged to CAD) outperformed unhedged ETFs over the past two years, largely due to a depreciating Yen.
Source: Bloomberg; as of December 29, 2023.
While most developed market central banks are considering cutting rates in 2024, the Bank of Japan is looking instead to start hiking rates. That will trim the sizable interest rate gap between Japan and the rest of the world, and may help provide support for the Yen, and Japan’s bank stocks.
In Europe and the UK, stock valuations look attractive relative to the S&P 500, even when accounting for the difference in sector weightings.
Source: Bloomberg, Mackenzie Investments; as of December 31, 2023; US Large Cap Equities: Solactive US Large Cap CAD Index, International Developed Market Equities: Solactive GBS Developed Markets ex North America Large & Mid Cap CAD Index, Canadian Equities: Solactive Canada Broad Market Index.
The valuation gap was covered well in a recent piece by Mackenzie’s Multi-Asset Strategies Team on ‘Compelling prospects in international markets’. In this piece, the team states “cheap valuations justify higher expected returns for European stocks than for their US and Canadian counterparts”.
International Equity ETFs
QDX (Mackenzie International Equity Index ETF) and the CAD-hedged version QDXH provide diversified exposure to ~1000 stocks from Developed Markets globally (excluding US and Canadian stocks). If the US economy remains resilient, global growth surprises and central banks (particularly in Europe and the UK, which have seen softer economic data of late) deliver on rate cuts, this could help buoy international equities in 2024.
Canadian investors can position towards resilient global growth and away from a potential Canadian recession, by allocating to an ETF like QDX, which invests primarily in European, UK and Japanese stocks.
Source: Mackenzie Investments; as of December 31, 2023.
ETF News & Notes
Global Real Estate Investment Options
Global REITs, having been battered by the rate hikes in 2022/2023, may be poised for better returns as central banks consider rate cuts in 2024. Last quarter showed what the return potential looks like for a rate sensitive sector that has broadly underperformed the last couple of years. QRET (Mackenzie Developed Markets Real Estate Index ETF) was up +14.2% in Q4 as risk assets rallied on the back of declining bond yields.
Source: Bloomberg; as of December 31, 2023.
QRET (Mackenzie Developed Markets Real Estate Index ETF) has a weighted average dividend yield of 4% and invests in REITS/real estate development companies in developed markets globally.
When trading ETFs, keep an eye on the clock!
For ETFs that track markets outside of Canada, spreads on these ETFs tend to be tightest when the underlying market is trading. For Canadian listed ETFs tracking European equities, this would be roughly 9:30 - 11:30am EST time.
For US equities, advisors should be aware of US holidays that impact US markets, but not necessarily Canadian markets. For instance, January 15, 2024, was Martin Luther King Jr. Day and thus US markets were closed. Therefore, the spreads on US equity ETFs trading in Canada were wider on average that day than usual.
Finally, remember to avoid trading, if possible, in the first and last 15 minutes of the day. In the first few minutes after the market open an ETF’s underlying securities may not have all started trading. In this case, the market maker cannot accurately price the ETF, potentially leading to wider spreads.
As we approach the market close, market participants seek to limit their risk. With fewer market participants willing to make markets, spreads can widen.
Join us for our upcoming webinar February 6th, 2024
Following the most rapid increase in policy rate in decades, the fixed income market is now home to a vast opportunity set. Join us for diverse insights on how to reconstruct your fixed income allocation in the current rate environment. Get practical insights and a deep understanding of how to use tactical fixed income plays. Registration link below:
ETF Flows Update
A few more highlights to cover off 20231:
- The total ETF AUM in Canada closed out the year around it’s record high of ~$383 billion. This reflects a roughly 18.9% compound annual growth rate over the last seven years.
- Canadian ETFs added around $4.2 billion in net flows during December, bringing the YTD flows to $38.6 billion.
- The recent ETF flows momentum amplified the delta relative to Mutual Funds in Canada: since 2019, ETFs have had larger inflows than Mutual Funds YTD in 2023 and in 4 out of the last 5 calendar years.
Mackenzie ETF Top Performers
1 Source: Morningstar, Mackenzie Investments; as of December 31, 2023
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