Quick note: As a Canadian, I posted this in the Canadian forums, but I'm reposting here for some additional visibility. I'm changing all mentions of XEQT to VT which is the most similar ETF for comparison.
I know it's impossible to predict which stocks / countries will outperform in the long term. But, historically speaking, it appears to me that US markets have (over the long term, 10+ year periods) outperformed the world on an absolute basis.
I strongly believe that simply because of the structure of global financial markets, with the US dollar being the reserve currency, the US markets will always be the best place to invest. This is very important – really, take some time to think about it. The US have the worlds reserve currency and that isn't changing any time soon – this gives them a massive advantage. I would even argue this will not change without a calamitous / world changing event, which would likely make investments anywhere in the world lose significant value, depending on how things shake out. All to say, the US won't just let their reserve status disappear without a fight, and I wouldn't bet against the US.
I also know the US had a lost decade between 2000 – 2010, and I feel that a lot of people bring up this timeframe as an argument in favor of global diversification, but it's cherry picked data. If you start in 1996, all of a sudden the US market outperforms global Ex-US equities. This reinforces my perspective that over the long term, the US outperforms the world, even if in shorter periods (5-10 years), Ex-US markets can outperform.
Now onto my thoughts on VT, how my perspective evolved on this ETF, and why I'm starting to think this may be an inefficient way of investing, and possibly even “diworsification”.
Initially I loved the idea of VT because it's low cost, globally diversified, and gives you access to global equities. It's “safe” and protects you from 1 country risk like a Japan 1989 scenario. But, when I really think about it at it's core, VT is an ETF that is highly correlated to US markets, but with a higher expense ratio, and performance drag from other countries / currencies.
This is a huge problem in my mind, and something people seem to be ignoring. When you really break it down, what you're buying with VT is the US market, but with a higher MER, and a bunch of diversification just for the sake of diversification which causes a drag on performance.
Why do I say it's pointless diversification? Mainly because US markets have ALWAYS outperformed global markets over the long term (10+ years). Again, I know there are several periods of underperformance where Ex-US outperforms US, but in the longer term, the US always comes out on top. To reiterate my earlier point, people say look at 2000 – 2010 as a reason to diversify globally, but this is cherry picked data. Look at 1996 – 2010 and the US wins over Ex-US.
For most of us who have 15-30+ year time horizons, it seems worth the risk to invest solely in the US. They have the world reserve currency, the most diverse economy, the best capital / financial markets in place for investors, the best investor protections, and the worlds most successful companies to ever exist.
So why should someone willfully invest their money in countries where they have worse investor protections, less profitable companies, more corruption, currency risk etc?
I would love to hear some other thoughts on this.
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