Passive/Index Investing: country allocation is confusing to me.

Good question. Knowledgeable investors in this forum will talk about it

Just point out that VGRO's goal is capital appreciation and GDP numbers don't necessarily reflect that. For example, Japan is the third largest economy entity in GDP measurement but their stock price doesn't provide good enough capital gains. So portfolio allocation based on GDP is not necessarily the best way

Just did a quick googling.
Nikkei 225 increase 17% from 1991 and S&P increased 1300%

Not mention you should only invest in free market

One of the biggest misconceptions that people put is on the importance of country weighting.

The reality is that there isn't really a right way to do it. Some countries will outperform other markets and there isn't really. Other markets don't have accessible capital markets (ie China, and currently Russia). And when we look at most companies in most developed, heck even emerging markets, the exposures these companies have are mostly on foreign (to their home) markets. If we look at the Emerging Markets index funds, we will see in the top names like Samsung, Taiwan Semiconductor etc. and these names will probably make more money abroad than their home markets in most cases.

A risk that foreign markets play is geopolitical as well as forex risk. Like do you believe in having a large weighting in countries like China and Russia where capital markets are immature or sanctioned? They are quite large, but demonstrate huge risks. Additionally, Canadian equity tends to represent mostly stable, staid companies such as the banks, telecoms and railways. With these factors combined, I believe an outsized (to it's world weighting) of Canadian equity makes sense precisely because it provides stability.

But ultimately when we look at large companies in most of these equities, they all derive their income from abroad. Therefore especially with globalization, it really doesn't matter. Ultimately geographical diversification is just a simple tool to try to provide some diversificaation. But whether one country shold have higher weighting or not, ultimately it doesn't matter too much especially among mature markets. Only until fairly recently (2005), RRSPs had to mostly hold Canadian investments and retirees were perfectly fine.The main goal should be diversification and ensuring your portfolio has a degree of stability that is pertinent to your needs. You could buy an ETF like VT (US listed) that would achieve what you are getting at.
https://investor.vanguard.com/etf/profile/VT

IN the end though, I wouldn't put so much focus on the actualy exact weighting. I think for most passive investors, a heavier bias on domestic markets is warranted as it provides stability. Of course there is nothing wrong to change this, but I wouldn't count on any outperformance merely because the weighting is different.

If you don't like the allocations, just buy the underlying funds.

Canada has the best banks. Best telcos. Some of the best pipeline/energy companies. Some of the best utility companies.

The US has the best of everything else (Healthcare, Tech, Consumer Staples/Discretionary).

I only invest in US and Canadian companies. THe best in the world!

A good answer already was given above, however, I just want to highlight that diversification is a technic used in capital preservation and so it is not at all about gains.

As mentioned above, there are many dimentions to diversification - by asset type, country, industry etc. There are many strategies how to create an index, many indexes and many implementations of those indexes by different investements. Different indexes have different properites, advantages and disadvantages. Only you can decide what is best for you based on understanding the details and matching the right investement to your needs.

A pure market capitalization weighted global index fund would have holdings similar to the graphic in your original post.

There are reasons why an investor or fund may choose to overweight Canada relative to it's global percent of stock market asset allocation.

1. Tax treatment: Canadian dividends have a lower tax rate than international dividends, so overweighting Canada may result in lower tax in a non-registered account
2. Volatility: The Canadian stock market is heavily weighted in specific sectors, including financial, materials, energy and industrials. These sectors tend to move differently than markets like the US, which has a higher proportion of IT, healthcare and consumer. Overweighting Canada takes advantage of that to lower volatility
3. Currency fluctuations: Holding more Canadian stocks lowers foreign currency fluctuation and risk, which is important to retirees that want stable income and want to avoid sequence of return risk that may come from currency movements.
4. Cost: it is cheaper to invest in Canada

There are several studies that show benefits from overweighting Canada, although the optimum amount is subject to interpretation and cannot be known in advance.
Home Bias in the Vanguard Asset Allocation ETFs
For investors, a little home country bias goes a long way

Mawer offers two global balanced funds. MAW120 over-weights Canada, whereas MAW130 has closer to a global market cap allocation.

Here is Rational Reminder's conclusion from the second link above:

How much home bias is optimal? Based on these factors there are trade-offs to think about. We know that global diversification is important, but too much diversification might actually increase portfolio volatility (at least based on Vanguard’s model). We also know fees and taxes make the cost of investing outside of Canada a bit higher than investing in Canada. Moreover, from a behavioural perspective, it might feel bad to own too few Canadian stocks when the Canadian stock market is doing well.

Understanding these trade-offs, it is not obvious exactly how much home bias is optimal, but I would argue that a degree is acceptable, if not desirable. With no easy answer about geographic allocation, following a simple, even split across Canadian, U.S., and International stocks is probably a sensible solution.

I'll do a bit of reading too better understand but the posts above are very helpful.

A few points for consideration that is not clear:

• emerging markets should in theory grow way faster than developed nations. Investing in Brazil, Mexico, India for example should be double digits given so much growth opportunity.
• another aspect is simply to have a greater diversification against geographical risks, such as war. If all of Europe and US get involved in a world war, then investing in rest of the world will bring better returns and help create stability.

WinterSleep wrote: ↑I'll do a bit of reading too better understand but the posts above are very helpful.

A few points for consideration that is not clear:

• emerging markets should in theory grow way faster than developed nations. Investing in Brazil, Mexico, India for example should be double digits given so much growth opportunity.
• another aspect is simply to have a greater diversification against geographical risks, such as war. If all of Europe and US get involved in a world war, then investing in rest of the world will bring better returns and help create stability.

Counter Argument:

• Many emerging markets stay "emerging" for a reason. They are often corrupt or unstable countries that can't really get rich.
• GDP growth is a poor indicator of stock growth especially if inflation is high in these countries.
• Just because GDP/Economic growth occurs doesn't mean equities are worthwhile. For instance, an economy could grow, but foreign companies are going in taking advantage of the growth. Meanwhile domestic companies in these countries haven't benefited

I would recommend you take the return of say VEE or a BRIC fund and have you compare returns to developed markets. Heck, even a China index fund shows this. Healthy equity market development requires more than just GDP growth. And until many of these countries develop proper property rights, free markets and a healthy &,more-or-less equitable economy, it is difficult to forsee sustained growth in their stock valuation.

WinterSleep wrote: ↑ I'll do a bit of reading too better understand but the posts above are very helpful.

A few points for consideration that is not clear:

• emerging markets should in theory grow way faster than developed nations. Investing in Brazil, Mexico, India for example should be double digits given so much growth opportunity.
• another aspect is simply to have a greater diversification against geographical risks, such as war. If all of Europe and US get involved in a world war, then investing in rest of the world will bring better returns and help create stability.

Regarding to your second point (US and Europe have wars), US and Europe are the biggest market to emerging countries, if demand in US and Europe are destroyed due to the war, emerging market such as China might not be doing well. I'd even argue they could be even worse than US market.

Also keep in mind that a company having its HQ in a country doesn't mean it's only doing business there.

Take Apple and Pepsi as examples, while they're listed as US, they generate revenues everywhere on the planet so by holding these assets, you're not just owning US assets.

Thanh wrote: ↑ Also keep in mind that a company having its HQ in a country doesn't mean it's only doing business there.

Take Apple and Pepsi as examples, while they're listed as US, they generate revenues everywhere on the planet so by holding these assets, you're not just owning US assets.

As a crazy example. Standard Chartered is a bank domiciled in the UK, but has almost zero business there :P

Deepwater wrote: ↑ A pure market capitalization weighted global index fund would have holdings similar to the graphic in your original post.

There are reasons why an investor or fund may choose to overweight Canada relative to it's global percent of stock market asset allocation.

1. Tax treatment: Canadian dividends have a lower tax rate than international dividends, so overweighting Canada may result in lower tax in a non-registered account
2. Volatility: The Canadian stock market is heavily weighted in specific sectors, including financial, materials, energy and industrials. These sectors tend to move differently than markets like the US, which has a higher proportion of IT, healthcare and consumer. Overweighting Canada takes advantage of that to lower volatility
3. Currency fluctuations: Holding more Canadian stocks lowers foreign currency fluctuation and risk, which is important to retirees that want stable income and want to avoid sequence of return risk that may come from currency movements.
4. Cost: it is cheaper to invest in Canada

There are several studies that show benefits from overweighting Canada, although the optimum amount is subject to interpretation and cannot be known in advance.
Home Bias in the Vanguard Asset Allocation ETFs
For investors, a little home country bias goes a long way

Mawer offers two global balanced funds. MAW120 over-weights Canada, whereas MAW130 has closer to a global market cap allocation.

Here is Rational Reminder's conclusion from the second link above:

Would you say something like ZGRO is a good long term investment for 100k?

All of the Asset Allocation ETFs are good choices for index investors. ZGRO is 80% equities, so I would not use it for an expected holding period of less than 5 years and preferably 10 years, especially if you will really need the funds at the end of that time.

ZGRO's international holdings are less diversified than the corresponding funds from iShares and Vanguard. For example ZGRO uses ZEA for its global developed market holdings. ZEA has 833 holdings, compared to 2608 holdings for XEF which is used for global developed markets in iShares XGRO. Those additional holdings are small companies and compromise a small share of the overall holdings and are not likely to make a big performance difference.

This is a really good discussion on geographic diversification. Rightly or wrongly, I have shied away from investing outside of Canada and US. From my perspective sector diversification is more important than geographic diversification. Buying the world is one way to obtain sector diversification. It is not the only way. Sector diversification can be achieved investing in Canada and US only. Doing so offers the advantage of political stability and home country bias minimizes currency risks. I mentioned this a couple of times before, staying close to home offers good protection by way of the Monroe doctrine and its carry over into US foreign policy since 1823.

Deepwater wrote: ↑ All of the Asset Allocation ETFs are good choices for index investors. ZGRO is 80% equities, so I would not use it for an expected holding period of less than 5 years and preferably 10 years, especially if you will really need the funds at the end of that time.

ZGRO's international holdings are less diversified than the corresponding funds from iShares and Vanguard. For example ZGRO uses ZEA for its global developed market holdings. ZEA has 833 holdings, compared to 2608 holdings for XEF which is used for global developed markets in iShares XGRO. Those additional holdings are small companies and compromise a small share of the overall holdings and are not likely to make a big performance difference.

Thanks. My time horizon is 30 years and have 100k to invest. It will not be needed at all before then.

Based on the 100 minus age rule, I should put 65% equity and rest as bond. But currently feeling a bit more bullish so 80%. May change that soon.

My concern with these funds was overexposure to canadian market. And not enough from rest of world. Sure 2010 to 2020 saw massive gains in US, mainly tech stocks. But that could easily saturate like it has in Japan. So I'm not sure if this wisdom of the crowds make a lot of sense. A lot of it seems hand wavey.

Sure canadian and US markets are dependent on emerging markets but many things can change and these emerging markets could start shifting to using products from other countries.

WinterSleep wrote: ↑ Thanks. My time horizon is 30 years and have 100k to invest. It will not be needed at all before then.

Based on the 100 minus age rule, I should put 65% equity and rest as bond. But currently feeling a bit more bullish so 80%. May change that soon.

My concern with these funds was overexposure to canadian market. And not enough from rest of world. Sure 2010 to 2020 saw massive gains in US, mainly tech stocks. But that could easily saturate like it has in Japan. So I'm not sure if this wisdom of the crowds make a lot of sense. A lot of it seems hand wavey.

Sure canadian and US markets are dependent on emerging markets but many things can change and these emerging markets could start shifting to using products from other countries.

I wouldnt worry too much about that. Remember that even if there are changes in manufacturing prowess, mature economies still command large markets, IP, and generally increases in services sectors which can be argued as more valuable.

With all-in-Ones, the skewing is adjusted for you, so you should more or less get weightIng as the world changes.

One recommendation is to buy 80% ZEQT and 20% ZAG. This allows you to adjust the bonds as you see fit or as you get older. That way with each purchase you can adjust and not worry about selling for a while.