The 1 Index Fund I’d Hold in My Portfolio Forever – No Hesitation

For an index fund to earn a permanent place in my portfolio, it needs to satisfy three criteria.

First, it has to be low-cost. If I am going to own something for the rest of my life, I do not want excessive fees quietly compounding against me year after year. Every dollar paid in fees is a dollar that cannot compound on my behalf.

Second, it has to be diversified. I have no idea which individual stocks, sectors, or even countries will outperform over the next several decades. Rather than trying to predict the future, I would rather own thousands of companies spread across different industries, regions, and market capitalizations.

And finally, it has to come from a reputable provider. Ideally, that means a firm with billions, if not trillions, of dollars under management and a long history of putting investors first.

When I view the index funds through those lenses, only a handful of exchange-traded funds (ETFs) really make the cut. One of them is the Vanguard FTSE Global All Cap ex Canada Index ETF (TSX:VXC). Here’s why I like it.

What is VXC?

VXC is a passive ETF that tracks the FTSE Global All Cap ex Canada China A Inclusion Index. That sounds complicated, but the underlying concept is actually fairly simple.

The ETF holds a portfolio of thousands of stocks from around the world, excluding Canada. The largest allocation, at just over 60% of the portfolio, is invested in U.S. equities.

The next-largest allocation is international developed markets, which includes countries such as Japan, the United Kingdom, France, Germany, Switzerland, and Australia.

The smallest allocation is emerging markets, including countries such as China, India, Brazil, Mexico, and Taiwan.

Importantly, the portfolio is weighted by market capitalization. That means larger companies receive larger allocations. The bigger a company’s market value becomes, the more influence it has on the portfolio. As a result, large-cap U.S. stocks naturally occupy a significant portion of the ETF.

For Canadian investors, VXC effectively provides exposure to the majority of the world’s investable stock market outside Canada through a single purchase.

It is also a fairly large ETF by Canadian standards. Since launching on June 30, 2014, the fund has grown to approximately $3.5 billion in assets under management.

The fine print of VXC

Before buying VXC, there are a few details investors should understand.

First, the ETF is not free, but it is relatively inexpensive given the amount of diversification it provides. VXC charges a 0.22% management expense ratio (MER). On a $10,000 investment, that works out to roughly $22 per year in fee drag, which is substantially lower than what most actively managed mutual funds charge.

Income investors may also find the yield somewhat underwhelming. The ETF currently offers a trailing 12-month yield of approximately 1.2% and pays distributions quarterly. But that is not really the main attraction here.

VXC is designed primarily as a long-term total return investment rather than an income vehicle. Over the past 10 years, the ETF has compounded at an annualized rate of roughly 12.9% before taxes, assuming distributions were reinvested.

There is one final detail many investors fail to appreciate. VXC intentionally excludes Canadian stocks. That is not necessarily a disadvantage. In fact, it gives investors flexibility.

Rather than being forced into a predetermined Canadian allocation, investors can choose for themselves how much Canadian exposure they want. Some may pair VXC with Canadian dividend stocks. Others may supplement it with a broad Canadian equity ETF.

Either way, VXC can serve as the global core of a portfolio while allowing investors to customize their Canadian exposure separately.

The post The 1 Index Fund I’d Hold in My Portfolio Forever – No Hesitation appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.