Many Canadian investors suffer from home country bias by holding all, or a large portion of, their investments in Canadian stocks. This makes little sense for those looking to build a diversified portfolio. Canada makes up just 3 percent of the world’s market capitalization and its markets tilt heavily towards financials (banks & insurance) and resources (oil & gas).

As Exchange-Traded Funds (ETFs) grow in popularity it has never been easier for investors to access foreign markets and diversify their portfolio. International diversification helps reduce the overall risk of your portfolio and provides exposure to market sectors that may not be available in Canada.

Besides, not every market performs well at the same time. Canadian stocks might be slumping while U.S. or international markets are soaring. There’s also currency risk to consider: when the loonie falls in value, foreign stocks may be worth more in Canadian dollars.

ETFs are a cheap and easy way for Canadian investors to get exposure to foreign markets. Here are three ways for investors to get international diversification:

1. Go Simple with a one-fund solution

Investors can get all the international diversification they need with just one ETF. That’s right, since the introduction of All World ex Canada ETFs like iShares XAW, investors can own U.S., international, and emerging market stocks with one product for a low management expense ratio (MER) of 0.22 percent.

The pros of this simple approach are obvious. XAW essentially rebalances itself quarterly by tracking the performance of the MSCI All Country World Index ex Canada. That means fewer transactions for investors, since there’s no need to rebalance their foreign holdings.

XAW is a fund of funds, meaning it is made up of five U.S.-listed iShares ETFs, plus one Canadian-listed iShares ETF. With this simplicity, investors give up a bit of cost efficiency. Even at a modest 0.22 percent expense ratio, XAW is more expensive than holding its underlying funds individually.

There’s also an additional cost drag from foreign withholding taxes when this fund is held inside an RRSP or TFSA. This can add an additional 0.30 percent or more to the overall cost of the fund.

2. Get precise with several market-specific ETFs

Some investors might prefer more direct control over the foreign markets in which they invest, either by tilting more heavily towards emerging markets, specific sectors, small-cap stocks, dividends, or even smart-beta.

There’s seemingly an ETF for everything these days, so investors can fill their boots.

The advantage with this approach is the degree of control. Investors aren’t bound to one ETF that follows a certain methodology or set of rules. They can make their own rules, so to speak, and tailor their international diversification to their specific needs or tastes.

So perhaps instead of the popular iShares Core S&P 500 Index ETF (XUS), a dividend lover might opt for iShares US Dividend Growers Index ETF (CUD) or the new iShares Core MSCI US Quality Dividend Index ETF (XDU).

Internationally, the sky’s the limit. For example, the Canadian market has little exposure to health care, so here you could add something like HXC – iShares Global Healthcare Index ETF. Then there’s the Global Water Index ETF (CWW), the Global Agriculture Index ETF (COW), or even the Gold Bullion ETF (CGL).

A trade-off for the extra control and precision is that you’re also adding an extra layer of cost to your portfolio. More ETFs in your portfolio means more trades to buy and rebalance. You’re also adding complexity, which can lead to poor behaviour like analysis paralysis, or anxiety over which funds to buy and when to rebalance.

3. Save more with U.S.-listed ETFs

I touched on foreign withholding taxes and how they can be a drag on returns in tax-deferred or tax-free accounts. Investors can minimize foreign withholding taxes by holding U.S.-listed ETFs.

To do this, investors need to make transactions in U.S. dollars, which either means dealing with the Canadian – U.S. dollar spread, which can be expensive, or trying to implement Norbert’s Gambit, which can be complicated to master.

Venturing down this path can lead to significant savings, though, particularly for investors with sizeable portfolios.

To start, let’s unbundle iShares XAW and look at each of the underlying holdings:

• IVV – ISHARES CORE S&P 500 ETF – 44.26%
• *XEF – ISHARES MSCI EAFE IMI INDEX – 34.54%
• IEMG – ISHARES CORE MSCI EMERGING MARKETS – 12.14%
• IJH – ISHARES CORE S&P MID-CAP ETF – 4.14%
• IJR – ISHARES CORE S&P SMALL-CAP ETF – 4.10%
• ITOT – ISHARES CORE S&P TOTAL U.S. STOCK – 0.80%

*Ignore for the moment that XEF is actually a Canadian-listed fund. It’s more tax-efficient than its U.S.-listed counterpart IEFA.

If you were to buy each U.S.-listed ETF in XAW in their respective weights the total management fee would be approximately 0.11 percent.

The advantage to this approach is lower overall MER for the portfolio and the avoidance, to some degree, of foreign withholding taxes.

Read more about foreign withholding taxes in this excellent white paper by Justin Bender and Dan Bortolotti.

Finally, there’s the workaround called Norbert’s Gambit to deal with. It’s a cheap way for investors to convert Canadian and U.S. dollars by getting around the expensive currency spreads charged by brokerages. But it’s also complicated and investors will also incur an extra set of commissions.

Depending on the size of the trade, such as for large RRSPs, Norbert’s Gambit it may be worthwhile to save investors hundreds, if not thousands, of dollars each year.

Final thoughts on International Diversification

Exposure to foreign markets can lead to higher overall returns and also lower the risk of your portfolio. It’s important for investors to get international diversification in some form, whether it’s from a simple one-fund solution like I use, or through a more precise dissection of the global markets.

I dislike the term ‘sophisticated investor’ so let’s just say there are significant savings opportunities for those investors with sizeable portfolios who also possess the time and temperament to manage a portfolio of U.S.-listed ETFs.

Being able to manage money well is a necessary life skill, and the keystone for good financial planning. If you don’t have a handle on your cash flow, where your money is spent and how much to save, it will be harder to not only pay your bills on time each month, but to realize your future financial goals.

The good news is that technology has made it easier than ever to learn good financial habits such as budgeting your money, reducing how much you spend on your purchases, and calculating what you need to save.

Keeping track of your spending

Start with your own financial institution. Checking account balances, making transfers and paying bills online is just the beginning.

Most banks have a budgeting app that tracks your spending so you get a better idea of where your money is going. They connect securely to your bank accounts, automatically track your transactions and put them into categories for you. You can track your spending over time and access your spending history, so you can compare your current spending to your monthly average and make any necessary adjustments.

Check out the TD My Spend app, CIBC CreditSmart, and RBC MyFinanceTracker for iPhone and Android devices.

If all your accounts don’t reside with just one financial institution, there are lots of mobile apps and budgeting software available, such as the popular Mint.com, GoodBudget, and You Need a Budget.

Online coupon and price comparison sites

For frugal Canadians who hate to pay full price, coupons from online deal sites like Red Flag Deals and Smart Canucks can help you save money on your purchases.

For a weekly flyer comparison for your area check Mrs. January and Grocery Alerts which also match up those flyer deals with coupons. Find the best deal on groceries with grocery apps such as Flipp and Checkout 51.

Sign up with Great Canadian Rebates to earn cash back on your online purchases.

In addition to helping you save money on the purchases you make, smartphone apps make is easier to put money into your savings account. Typically, these apps will round your purchases up to the nearest dollar and put the extra change into your bank account.

This is the 21st century version of saving your change in a jar – the start of an emergency fund perhaps.

Online calculators

If you’re around my age, you’ll remember having to do complicated and time-consuming math (remember logarithm books?) to calculate such things as compounding, mortgage and loan payments, and comparisons.

Fortunately, there are plenty of tools available that can quickly help you with the most complex scenarios to help you make smart decisions.

• See how much you can save by paying your balances down faster on credit cards, loans and mortgages.
• See how fast your retirement savings grow based on how much you contribute.
• For those already contributing, check what your nest egg will be in 10, 20 or 30 years from now.
• A life insurance worksheet will help you decide on the optimum amount to buy.
• Is it more cost effective for you to buy a home or rent instead?
• How much will university cost?
• Compare bank accounts and credit cards to find the best one for you.

If you do a search for the different online calculators, you will get a bazillion hits. A good place to start looking is your financial institution website. Other good, multiple event calculators are available on the sites from Get Smarter About Money, Fiscal Agents, and sync.com.

Just be aware that each site uses different assumptions and algorithms to reach their conclusions. Use them as the tools that they are, and maybe compare a couple of different ones.

Final thoughts

Whether you’re digging yourself out of debt, saving for a specific goal, or trying to get a better handle on your budgeting and spending there’s a smartphone app or website or online calculator to help you. These tools are fun to use, and worth looking into.