Canadian Stocks Set to Dominate the Global Market

Here’s why I would personally overweight Canadian stocks in my portfolio.

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It’s easy to think of the U.S. stock market as the perennial powerhouse, but the historical data tells a different story once upon a time.

For example, in the early 1900s, the U.K. stock market dominated the global scene, fueled by its imperial reach. By the mid-20th century, the United States had ascended to the top spot, largely propelled by its economic prowess in the post-war era.

Fast forward to today, and the U.S. market still holds a significant share, but that doesn’t mean the situation is static. Currently, Canada’s share of the global stock market is around 3% — a number that might seem small but is potent with potential.

Here’s a look at two compelling reasons to overweight Canadian stocks in your portfolio and my exchange-traded fund (ETF) pick to put this into play.

Currency risk

One of the lesser-discussed but significant aspects of investing internationally is the issue of currency risk.

When you invest in stocks from another country, you’re not just betting on the performance of the company but also on the performance of that country’s currency against your own.

If the Canadian dollar weakens against the U.S. dollar, for example, your returns could suffer even if the underlying companies perform well.

However, investing in Canadian stocks offers a certain layer of protection against this risk, especially for Canadian investors.

The local currency denomination makes it easier to avoid the pitfalls of forex volatility that might impact returns from other international investments.

Tax efficiency

If you’ve already maxed out your tax-sheltered options like a Tax-Free Savings Account or Registered Retirement Savings Plan, or prefer the flexibility of a non-registered taxable account, you’ll find Canadian stocks particularly tax efficient.

Dividends from Canadian corporations are often eligible for the Canadian Dividend Tax Credit. This credit is designed to offset the double taxation issue—once at the corporate level and again at the individual level—that dividends usually face.

When you hold Canadian stocks in a non-registered account, this tax credit can significantly reduce the tax liability on your dividend income, offering an effective way to generate more after-tax income from your investments.

In contrast, dividends from foreign corporations don’t qualify for this tax credit and may be subject to withholding taxes from the country of origin. This can create a less favourable tax situation compared to domestic dividends.

What ETF to use

While picking individual stocks has its merits (and the Fool has some great suggestions below), I personally prefer the diversified approach of using an exchange-traded fund (ETF) to capture the overall Canadian market. My go-to choice for this is iShares S&P/TSX 60 Index ETF (TSX:XIU).

Not only does this ETF give you exposure to some of the largest and most influential companies in Canada, but it also holds the distinction of being the world’s first ETF, launched all the way back in 1990.

Currently, XIU charges an annual expense ratio of 0.18%, or about $18 in fees for a $10,000 investment. It also pays a decent 12-month trailing dividend yield of 3.21% as of September 1, 2023.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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.

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