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Andrew Hallam
05.09.2018

After New Regulations, Here’s How Canadians In Europe Can Build A Portfolio Of ETFs

In January 2018, a new European Union regulation rattled plenty of Canadian expats living in Europe. Many had built diversified portfolios of low-cost ETFs.

They had taken such advice from multiple Nobel Prize winners in economics. Warren Buffett is among the strategy's supporters. In fact, that's how his personal estate (on behalf of his heirs) will be invested when he dies. He's putting his money in a portfolio of low-cost index funds.

But EU regulators now say European residents can't buy ETFs from the Toronto or the New York Stock Exchanges. That doesn't mean they can't follow Buffett's advice. I'll explain how they can. But first, let's lay out a few important facts:
 

  1. If you don't live in Europe, this won't affect you.
  2. If you already own ETFs that trade on the Toronto Stock Exchange or the New York Stock Exchange you don't have to sell them; although, I don't recommend owning ETFs that trade on a U.S. exchange.
  3. You can continue to hold your current ETFs if they trade on the Toronto or the New York exchanges, but you can't add money to them.
  4. All EU brokerages have been asked to comply with this rule. The rule has even extended to the U.S. brokerage, Interactive Brokers, which enforced the rule in June for its European-based clients.
  5. Canadians in Europe that use Canadian-based brokerages won't be affected.
     

Now for some better news:

Canadians in Europe can build their portfolios from a European stock market. Such portfolios would almost be identical to those I created in my book, Millionaire Expat: How To Build Wealth Living Overseas.

I've included portfolio models below.

But first, let's look at this new European rule.Think of it as a giant magnetic net. It was tossed into the ocean to attract sharp metal objects that might hurt the fish. Unfortunately, it snared a few dolphins too.

That giant net is called a PRIIP. It stands for Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products. Asset managers in Europe are supposed to provide a Key Information Document (KID) to EU-based clients that buy certain products. Such products include ETFs. The KIDs are available for European-traded ETFs. But the asset managers (the ETF providers) haven't made them available for ETFs that trade outside the European Union.

That's why EU residents can't buy ETFs that trade outside the the EU.

As previously mentioned, however, Canadians (and other non-Americans) can buy ETFs from a European stock exchange. Canadians that plan to repatriate one day might prefer that their portfolios have a slight home-country bias. That would reduce their foreign currency risk. To do so, they could include a Canadian stock market index, such as the iShares MSCI Canada ETF. It trades on the London Stock Exchange. Its expense ratio cost is 0.48 percent per year. That's a little high for an ETF. But iShares has a history (as do most ETF providers) of lowering costs over time.

For global stock exposure (including the United States) investors could add the iShares Core MSCI World ETF (IWDA). It's a developed world stock index. But it doesn't include exposure to emerging market stocks. That's why investors should add the iShares Core MSCI EM IMI. Both of these ETFs trade on the London Stock Exchange.

To date, no European stock exchange offers a Canadian bond market index. But they offer plenty of international bond market indexes. Canadians could purchase the iShares Global Inflation-Linked Government Bond ETF (IGIL).

Overall, such a portfolio would cost investors little. On average, it would cost about 0.26 percent per year. That's slightly higher than an equivalent portfolio trading on the Toronto Stock Exchange. But complaining about such costs is like a runner whining about the weight of his shoe laces. It won't have any significant bearing on the race-or on your retirement.
 

Model Portfolios For EU-Based Canadians Who Plan To One Day Repatriate To Canada

Fund Name Ticker Symbol Expense Ratio Listed Currency Conservative Cautious Balanced Assertive Aggressive
iShares MSCI Canada CCAU 0.48% USD 15% 20% 30% 35% 45%
iShares Core MSCI World ETF (global stocks) IWDA 0.20% USD 12% 20% 22% 30% 30%
iShares Core MSCI EM IMI UCITS EIMI 0.18% USD 3% 5% 8% 10% 15%
iShares Global Inflation Linked Gov’t Bond ETF (global bonds) IGIL 0.25% USD 70% 55% 40% 25% 10%

Note: Each ETF above trades on the London Stock Exchange

Canadians who aren't sure where they want to retire could build something simpler. I call them Global Nomad Portfolios. They're similar to the portfolios above, but they don't include a Canadian stock market index.
 

  Model Portfolios For Global Nomads

Fund Name Ticker Symbol Expense Ratio Listed Currency Conservative Cautious Balanced Assertive Aggressive
iShares Core MSCI World ETF (global stocks) IWDA 0.20% USD 27% 40% 52% 65% 75%
iShares Core MSCI EM IMI UCITS EIMI 0.18% USD 3% 5% 8% 10% 15%
iShares Global Inflation Linked Gov’t Bond ETF (global bonds) IGIL 0.25% USD 70% 55% 40% 25% 10%

Note: Each ETF above trades on the London Stock Exchange

Some Canadians, however, will prefer to retire in Europe. To reduce foreign currency risk, they could tilt their portfolios towards European stocks and bonds. I’ve provided portfolio models below.

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Model Portfolios For Canadians That Might Choose To Retire In Europe

Fund Name Ticker Symbol Expense Ratio Listed Currency Conservative Cautious Balanced Assertive Aggressive
iShares MSCI Europe (accumulating) SMEA 0.12% Euro 10% 15% 20% 25% 30%
iShares Core MSCI World ETF (global stocks)* IWDA 0.20% Euro 17% 25% 32% 40% 45%
iShares Core MSCI EM IMI UCITS EIMI 0.18% USD 3% 5% 8% 10% 15%
iShares Euro Gov’t Bond 1-3 yr Euro (accumulating)
or
iShares Euro Gov’t Bond 3-7 yr Euro ETF (accumulating)
CBE3

CBE7

0.20%

0.20%

Euro 70% 55% 40% 25% 10%

 

Note: IWDA trades in Euros on the Amsterdam exchange. The rest trade on the London Stock Exchange

These ETFs aren't the only available products. Others trade on different European exchanges. Just remember to diversify. Include high exposure to a global stock index. Add a government bond market index (ETF) to add stability.

But here's what's most important: Don't build your portfolio based on yesterday's winning funds. Markets that perform well during one time period (U.S. stocks are a current example) often disappoint the next. Neither you, your broker, your brilliant Uncle Ted or the Chairman of the Federal Reserve know which markets will provide the best future profits. That's why it's important to own them all.

We also need to remember what Warren Buffett says: "Stock market forecasters exist to make fortunetellers look good." Investors should diversify and stick to their plan through good times and bad. That might not sound sophisticated. Most investors eventually feel the urge to tinker. But resist that urge. Those that stick to their plan over an investment lifetime will beat most professional stock pickers. They'll beat most hedge managers too.

 

 

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas


Internaxx Bank S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Internaxx Bank and Internaxx Bank accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Internaxx Bank.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

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