The holdings page of the Vanguard Total World Stock ETF (VT) is a good place to obtain data on the regional weightings in the world stock markets. The ETF tracks the FTSE All World Index, which in turn tracks the performance of about 2,700 stocks in the U.S., Europe, Pacific, Emerging Markets and Canada. If you net out the 3.6% allocation to Canada, here’s how the regional market weightings stack up (as of Feb. 28, 2010):

United States: 43.5%
Europe and Pacific (EAFE): 42%
Emerging Markets: 14.5%

It is interesting that the share of Emerging Markets has grown in the world stock markets from roughly 10% in 2005 to close to 15% now. Correspondingly, the share of US and EAFE markets has declined from about 45% each to 43.5% and 42% respectively today.

The Sleepy Portfolio started out with a 22.5% allocation to US and EAFE markets and a 5% allocation to Emerging Markets. This data suggests that the share of Emerging Markets in the portfolio should be boosted to 7% and US and EAFE market allocations cut by 1%.

This article has 10 comments

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  2. Given that info, why would the Sleepy Portfolio have so much weighted in Canada? 3.6% vs. your 20-ish% is causing your portfolio to be heavily balanced in one of the smaller markets out there.

  3. Canadian Capitalist

    @E: There are a few really good reasons for Canadian investors being overweight in our local stock market:

    1. In today’s globalized economy, the expected returns from Canadian stocks are not likely to be materially different from other developed markets over the long term. Canadian investors who are resident in Canada have future liabilities in Canadian dollars. Therefore, Canadian investors should hold enough foreign stocks to obtain the benefits of diversification but should be wary of taking on too much currency risk. Is a 30-70 Canada-International, the right split? Is it too much or too little? You could argue either way and not reach a consensus. Some argue that given that Canada makes up less than 4% of global markets, a 30% allocation is too much. Others point out that the benefits of diversification can be achieved with a much lower foreign allocation, say a 70-30 split instead. I don’t think there is a right answer here, so I picked an allocation that seemed reasonable to me.

    2. Preferential treatment of Canadian dividends: In taxable accounts, depending on your tax bracket, the taxes on eligible dividends might be half that of foreign dividends. Assuming a dividend yield of 2.5%, this translates to a loss of as much as 1.25% per year.

    3. Withholding taxes: Foreign stock dividends might be subject to withholding taxes even if held in a RRSP account.

  4. I think you’ve covered the issue of withholding taxes before but now you’ve got me wondering. My foreign equity is comprised of just two securities: VEA and VWO. They are both held in my RSP. Am I correct in understanding that distributions from these two ETFs are NOT subject to any withholding tax (as long as they remain in my RSP)?

    I take the easy way out on the issue of diversification. I allocate the equity portion of my portfolio evenly among Canada, US and Int’l. I have reduced exposure to EM.

    For currency, my IPS states that no more than 40% of my portfolio can be in USD at any one time. This gets ratcheted down each year, so that by the time I’m 55 (when I plan to retire) a maximum of 10% can be in USD.

  5. Canadian Capitalist

    @DM: VEA and VWO are US-listed stocks that hold foreign stocks. Therefore, the withholding tax between the US and the foreign country that the stocks in the ETF are listed in applies. The ETF pays the withholding tax and this is not recoverable for Canadian investors. When a Canadian resident holds VEA and VWO in a RRSP account, there is no US withholding tax but the US-Foreign withholding tax is already deducted. Vanguard adjusts the index return for withholding taxes but these taxes are a cost for investors.

  6. Thanks for your insights on that one CC.

  7. Maybe I’m missing something here CC.

    Isn’t it all about alpha and beta?

    The economies (and underlying companies) from different regions are growing or shrinking with respect to one another, but that in itself should have no bearing on your performance. It will affect your performance compared to that particular index, but as you yourself point out in your response to “E”, over-weighting some regions like your home country has many benefits.

  8. I use VT to *directly* guide the allocation of my portfolio. I use VEA, VWO and a mishmash of stuff for North America to match VT’s allocations.

    This approach appeals to me because it feels like I’m following “an index of indexes”. It keeps me from thinking about allocations in the same way that an index fund keeps me from thinking about individual stocks. Couch potato squared.


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  10. The US rally in September will hopefully spark some increased consumer confidence. I still think the Canadian Stock Market is a great alternative, especially while the US dollar is on shaky ground. I think Canadian commodities are a good place to start.