Balance Your TFSA: A Top Strategic Canadian ETF to Own

Canadian investors tend to have a strong home country bias. That’s understandable. Canadian equities are tax efficient and currency risk appears manageable. The problem is that too much concentration in the TSX comes with its own risks, including high exposure to financials, energy and a relatively small number of opportunities.

Going too far in the other direction isn’t ideal either. A portfolio dominated by US equities increasingly means high exposure to a small part of the market, particularly large technology companies. That concentration has worked well in recent years, but leaves investors vulnerable to sector-specific reversals.

If you find yourself between these two extremes, international diversification can help. Exchange-traded funds (ETFs) make this easy, and stocks from developed markets outside North America are often the missing piece. One BMO ETF in particular fits this role well.

What are developed market stocks?

Developed markets equities come from countries with established economies, stable political systems, strong rule of law and mature financial markets. These include regions such as Europe, Japan, Australia and parts of Asia such as Japan and Korea.

The companies in these markets are generally global in nature. Many generate revenue on multiple continents and operate in sectors such as industrial manufacturing, healthcare, financial services, consumer goods and infrastructure. Compared to US markets, valuations tend to be lower, dividend yields tend to be higher and sector exposure is more balanced.

While growth rates may be slower than those of emerging markets, developed market stocks can offer more stable returns, diversification benefits and less dependence on a single sector or country.

A practical way to add developed markets

An easy way to access this segment is BMO MSCI EAFE Index ETF (TSX:ZEA).

ZEA tracks the MSCI EAFE Index, which covers developed markets in Europe, Australia and the Far East, but excludes North America and emerging markets. The index focuses on large and mid-cap stocks and covers approximately 85% of the investable market capitalization in these regions.

The ETF includes hundreds of companies in countries such as Japan, the United Kingdom, Switzerland, France, Germany, the Netherlands and Australia. Sector exposure differs significantly from Canada and the US, with higher allocations to financial services, industrials and healthcare, and less dependence on technology.

ZEA is also competitively priced. The expense ratio is 0.22% and offers a modest income component, which can contribute to smooth returns within a TFSA. As a strategic holding company, it works well with Canadian and US equity ETFs by reducing regional and sector concentration.