The most self-sacrificing way to help fight the trade war is to forgo U.S. stocks.
Statistics Canada says investors were reducing their holdings of U.S. stocks even before the trade war began. In recent weeks, I’ve heard from many people who either floated the idea of getting out of the U.S. stock market or had actually sold their U.S. exposure.
Some investors are looking to Europe to diversify beyond the Canadian stock market, which makes some theoretical sense in that some of the world’s largest economies outside the U.S., China and Japan are located there. But here’s the problem. European stock markets haven’t come close to U.S. returns over the past 10 years and have mostly lagged the Canadian market as well.
For comparative returns, consider these three index-tracking exchange-traded funds from Vanguard:
- Vanguard FTSE Developed Europe All Cap Index ETF (VE-T): A return of 18.2 per cent for the 12 months to Feb. 28, 11.4 per cent for the three years to that date, a tick less than 11 per cent for the five years and 6.8 per cent for the 10 years.
- Vanguard FTSE Canada All Cap Index ETF (VCN-T): A return of 23.3 per cent for the 12 months to Feb. 28, 10.2 per cent over three years, 13 per cent over five years and 8.4 per cent over 10 years.
- Vanguard S&P 500 ETF (VFV-T): A 12-month return of 26.1 per cent and 17.3 per cent for three years, 18.2 per cent for five years and 14.2 per cent for 10 years.
In theory, a more diversified alternative to U.S. stocks would be an international fund that includes stocks from the world outside North America. But international stocks as a group have lagged Europe. The Vanguard FTSE Developed All Cap ex North America Index ETF (VIU-T) made 13.8 per cent for the 12 months to Feb. 28, 9.5 per cent for the three years and 9.6 per cent for the five years. The fund hasn’t been around for 10 years.
Led by the tech sector, U.S. stocks have been stunningly good performers in the past decade. Gains at well above long-term average levels suggest a sharp pullback at some point, but let’s give U.S. stocks their due. They have a proven history of driving portfolio returns.
European stocks are a respectable alternative to U.S. exposure, but we’ve seen nothing in the past 10 years to suggest they can keep up.