Too much North American exposure in your portfolio? Consider adding a healthy dose of global diversification to your portfolio with Europe’s GRANOLAS – find out why and how in our latest article below.
While Canada Day has come and gone, it seems that “true patriot love” isn’t just in Canadian hearts;
it’s firmly embedded in our investment portfolios too. Due to the phenomenon of home country bias, many Canadian investors’ portfolios tend to overindulge in familiar Canadian and U.S. companies.
By concentrating on North America, Canadians might be missing out on compelling investment opportunities, far and wide. One option for value beyond our borders is international developed markets. As at May 31, 2024, $6.5 billion in Canadian ETF flows have gone into international markets year-to-date, which is up over 8% in 2023, according to data from National Bank.
Let’s explore what makes international developed markets an attractive investment opportunity compared to North America. We’ll examine a well-established index that tracks the progress of companies in these markets and discuss how Canadians can invest in these regions.
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WHY DEVELOPED MARKETS?
“ATTRACTIVE” VALUATIONS
Currently, price-to-earnings ratios (P/E) across international developed markets are lower than those in the United States, as can be seen in the chart below of major countries in MSCI’s EAFE Index.
P/E ratios help investors find the market value of a company’s stock when compared against the company’s earnings. A high P/E ratio might indicate a stock is overvalued or that investors expect high growth from the company.
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VALUE IN EUROPE
Bank of America’s (BofA) June 2024 fund manager survey highlighted that global asset managers have made their highest investment in Eurozone stocks since January 2022. BofA’s survey of 206 asset managers – which collectively oversee US$604 billion under management – found that they’re 30% overweight in the region.
Robert Almeida, Global Investment Strategist at MFS Investment Management told Bloomberg News that “Europe is certainly more attractive … there’s less earnings risk than in the U.S. and less valuation risk, too.”
Stock valuations and the expectations of a boost in business activity in Europe appear to be driving optimism in the region. As you can see from this chart, the Stoxx 600’s forward 12-month P/E ratio is near a record low relative to the S&P 500.
As U.S. markets continue to trade near all-time highs, value-seeking investors might want to consider Europe. European equities trade at discounts compared to their U.S. counterparts, presenting an attractive opportunity.
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YOU’VE HEARD OF “THE MAGNIFICENT SEVEN” NOW MEET EUROPE’s “GRANOLAS”
Originally coined by a Bank of America strategist, “The Magnificent Seven” is the name given to a group of high-profile technology companies that include NVIDIA, Microsoft and Apple. The Magnificent Seven symbolize technological advancement and their pivotal role in both the North American and global markets.
But Europe has its elite group of high-performing companies dubbed “The Magnificent Eleven” or “GRANOLAS” – a term first coined by Goldman Sachs in 2020 based on a loose acronym of the stocks’ names.
These are the firms that are part of this elite European group:
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“In the U.S., tech is still likely to remain the long-term winner,” Goldman Sachs strategists wrote in a note cited by Bloomberg News. “In Europe, it’s more likely to be a combination of structurally strong and/or stable sectors: Healthcare, Consumer Staples and Tech.”
This group of European companies represents around a quarter of the STOXX 600’s market cap, showcasing robust earnings growth, lower volatility, high and stable margins, strong balance sheets, and durable dividends.
![](https://www.globalx.ca/wp-content/uploads/2024/07/HETF-ND-043-EAFE-Blog-Graphics_5-1024x579.png)
“The leaders of the forthcoming market cycle will be companies that are able to generate earnings growth, sustainable dividend payouts and have healthy balance sheets,” the Goldman Sachs strategists wrote.
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While “The Magnificent Seven” focuses primarily on technology, the GRANOLAS span the Health Care, Consumer Cyclical, Consumer Defensive and Technology sectors. When compared to the “Magnificent 7,” one of the best-performing U.S. equity baskets, GRANOLAS offers much less volatility. Including European equities such as these in a portfolio could help boost risk-adjusted returns.
TRACKING DEVELOPED MARKETS: MSCI’S EAFE INDEX
The MSCI EAFE Index was launched on March 31, 1986. EAFE is short for “Europe, Australasia, and the Far East”.
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The index covers 21 developed markets with 766 constituents and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries it covers. That’s a total market cap of US$17 billion as at June 30, 2024.
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DIVERSIFICATION ACROSS GEOGRAPHIES AND INDUSTRIES
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Let’s take a closer look at three of the countries included in MSCI’s EAFE Index:
![](https://www.globalx.ca/wp-content/uploads/2024/07/HETF-ND-043-EAFE-Blog-Graphics_Japan-300x240.png)
Japan
- Fourth-largest economy in the world by GDP.
- With the Nikkei index rallying 28% in 2023, foreign investors hold US$100 billion more in Japanese investments than they did in 2013.
- Analysts at Yardeni Research see earnings growth for Japanese companies of 11.5% for 2024.
![](https://www.globalx.ca/wp-content/uploads/2024/07/HETF-ND-043-EAFE-Blog-Graphics_UK-300x240.png)
UK
- Recognized as a leading global business centre with a world-class regulatory system and a leading financial services industry with access to a market of over 60 million people.
- Bloomberg News cites three reasons to invest: the U.K. was “cheap, it’s high-yielding, and it’s unfashionable”.
- Economic growth – as measured by GDP – is seen to increase by 1.5% in 2025.
![](https://www.globalx.ca/wp-content/uploads/2024/07/HETF-ND-043-EAFE-Blog-Graphics_France-300x240.png)
France
- World’s seventh-largest economy by GDP, with tourism as a major industry.
- A leading destination for foreign investment in Europe, France also plans to invest 54 billion euros in the next five years as part of its France 2030 initiative.
- Economic activity is forecast to gain momentum in 2025 with 1.3% annual growth.
HOW TO INVEST
Global X has partnered with MSCI to offer four direct ways to invest in developed markets, based on an investor’s risk exposure and performance potential:
ETF | Investment Objective | Management Fee* |
Global X MSCI EAFE Index ETF (EAFX.U**/EAFX) | EAFX.U seeks to replicate, to the extent reasonably possible and net of expenses, the performance of an index that is designed to measure the performance of large and mid-cap securities across developed markets including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada (currently, the MSCI EAFE Index). | 0.20% |
Global X MSCI EAFE Covered Call ETF (EACC) | EACC seeks to provide, to the extent possible and net of expenses: (a) exposure to the performance of an index of large and mid-cap securities across developed markets including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada (currently, the MSCI EAFE Index); and (b) monthly distributions of dividend and call option income. To mitigate downside risk and generate income, EACC will employ a dynamic covered call option writing program. | 0.49% |
Global X Enhanced MSCI EAFE Index ETF (EAFL) | EAFL seeks to replicate, to the extent reasonably possible and net of expenses, 1.25 times (125%) the performance of an index of large and mid-cap securities across developed markets including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada (currently, the MSCI EAFE Index). EAFL will use leverage in order to seek to achieve its investment objective. Leverage will be created through the use of cash borrowings or as otherwise permitted under applicable securities legislation. | 0.45% |
Global X Enhanced MSCI EAFE Covered Call ETF (EACL) | EACL seeks to provide, to the extent reasonably possible and net of expenses: (a) exposure to the performance of an index of large and mid-cap securities across developed markets including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada (currently, the MSCI EAFE Index); and (b) high monthly distributions of dividend income and call option premiums. To generate premiums, EACL will be exposed to a dynamic covered call option writing program. EACL will also employ leverage (not to exceed the limits on the use of leverage described under “Investment Strategies” of the fund’s prospectus) through cash borrowing and will generally endeavour to maintain a leverage ratio of approximately 125%. | 0.75% |
*Plus applicable sales tax
**Trades in U.S. dollars
For traditional emerging markets exposure, investors might consider EAFX, which tracks the MSCI EAFE Index, providing physical replication and exposure.
EACC employs an options-writing program as part of its active management strategy, specifically covered call overlays. This is an investment strategy designed to generate the potential for additional income over and above the income from its underlying index exposure. As an options-based ETF, EACC seeks to generate higher yields relative to its underlying index and may result in higher levels of monthly income for investors. EAFL uses leverage, a strategy that can potentially magnify both gains and losses and the fund aims to generate approximately 1.25x the return of its underlying index.
With EACL, Canadian investors have access to developed markets outside North America with light leverage and a covered call overlay. This can potentially enhance growth and income potential while still providing underlying MSCI EAFE Index exposure.
Global X offers a world of opportunity with global possibilities. For more information on our extensive suite of ETFs, visit www.GlobalX.ca.
DISCLAIMERS
Commissions, management fees, and expenses all may be associated with an investment in products (the “Global X Funds”) managed by Global X Investments Canada Inc. The Global X Funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain Global X Funds may have exposure to leveraged investment techniques that magnify gains and losses which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the Global X Funds. Please read the relevant prospectus before investing.
Certain ETFs are alternative investment funds (“Alternative ETFs”) within the meaning of the National Instrument 81-102 Investment Funds (“NI 81-102”) and are permitted to use strategies generally prohibited by conventional mutual funds, such as the ability to invest more than 10% of their net asset value in securities of a single issuer, the ability to borrow cash, to short sell beyond the limits prescribed for conventional mutual funds and to employ leverage of up to 300% of net asset value. While these strategies will only be used in accordance with the investment objectives and strategies of the Alternative ETFs, during certain market conditions they may accelerate the risk that an investment in ETF Shares of such Alternative ETF decreases in value. The Alternative ETFs will comply with all requirements of NI 81-102, as such requirements may be modified by exemptive relief obtained on behalf of the ETF.
The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities or any index on which such funds or securities are based. The prospectus contains a more detailed description of the limited relationship MSCI has with Global X Investments Canada Inc. (“Global X”) and any related funds.
Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward-looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.
This communication is intended for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase investment products (the “Global X Funds”) managed by Global X Investments Canada Inc. and is not, and should not be construed as, investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor.
All comments, opinions and views expressed are generally based on information available as of the date of publication and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.
Global X Investments Canada Inc. (“Global X”) is a wholly owned subsidiary of Mirae Asset Global Investments Co., Ltd. (“Mirae Asset”), the Korea-based asset management entity of Mirae Asset Financial Group. Global X is a corporation existing under the laws of Canada and is the manager, investment manager and trustee of the Global X Funds.
Published July 16, 2024
Categories: Articles, Insights
Topics: International