The ABCs of Diversifying Away From SPY Stock for Canadians Investing in the U.S.

If SPY stock is your only country-level diversification, you are missing out on some opportunities. Here are the ABCs of diversifying beyond SPY.

Puja Tayal

Author Bio

Puja Tayal grew up in a small-business family where dinner conversations often centred on working capital and savings. Her early experiences with investing, particularly during the 2008 financial crisis, shaped her approach to understanding markets and evaluating investment opportunities. She began her career at a mutual fund company before moving into investor education and financial writing for asset and wealth management firms. Before joining The Motley Fool, Puja wrote for Market Realist, where she extensively covered the semiconductor industry. Her published work has also appeared in The Indian Express. Puja believes every stock has a story that can help investors understand its potential returns. She combines business analysis with different investing approaches to help investors make informed decisions and align their portfolios with their long-term financial goals. Outside of finance, Puja enjoys long drives, catching up with friends, watching superhero and science-fiction movies, and managing her family portfolio. She also has a keen interest in artificial intelligence and its potential to reshape the world.

Education

Bachelor's degree in Accounting and Finance, University of Mumbai (2007)
CFA Level I

Areas of Expertise

Qualitative company analysis, management strategy, risk assessment, long-term investing, portfolio diversification and rebalancing, dividend reinvestment, cyclical growth opportunities, compounding strategies, growth stocks, and dividend stocks.

Social Media Profiles

Favorite Investment Quote

"Risk comes from not knowing what you're doing." — Warren Buffett

Published December 8, 2023 4:40 pm EST

Investing in your own country is always a plus, as you know the stocks. But staying invested only in the TSX exposes you to country risk and limits your portfolio to a few sectors like energy, banking, and mining, which are Canada’s strengths. But if you want to invest in the automotive or semiconductors sectors, America has better stocks. The Tax-Free Savings Account (TFSA) allows you to invest in U.S. stocks without compromising your tax benefit.

exchange traded funds — Image source: Getty Images

Looking beyond SPY stock

The first investment option that comes to mind when considering investing in the U.S. is the S&P 500 Index, which comprises the top 500 stocks by market capitalization. It covers everything from Apple to Berkshire Hathaway to Costco. Information technology, financials, health care, and consumer discretionary sectors account for 65% of the index.

The SPDR S&P 500 ETF Trust (NYSEMKT: SPY) allows you to replicate the S&P 500 Index. From a diversification perspective, it might look like a good bet. While it mitigates risk from any sector or company, it also mitigates the gains.

The SPY ETF surged 73.9% in the last five years and 16.6% in 12 months, underperforming the semiconductor ETF and Nasdaq 100 Index. America’s strength is its tech sector, both hardware and software.

The Invesco QQQ Trust Series 1 (NASDAQ: QQQ), which tracks the Nasdaq 100 index, surged 142% in five years and 39% in 12 months, whereas the VanEck Semiconductor ETF (NASDAQ: SMH) surged 260% and 49%, respectively. While these tech ETFs outperformed the SPY in good times, the SPY outperformed in bad times.

During the tech stock sell-off from January 1 to October 7, 2022, SMH fell 44% and QQQ 34%, while SPY fell 23.6%. But refraining from investing in the tech ETFs for a cyclical dip is a huge opportunity cost. Instead, you can diversify your U.S. portfolio by buying all three ETFs. The right portfolio diversification is the one that maximizes returns and minimizes risks.

The ABCs of Diversifying Beyond SPY

Now that you know that the SPY ETF alone does not diversify your portfolio, here are the ABCs to diversifying your portfolio to maximize returns while SPY takes care of the risk.

A for artificial intelligence:

AI is the next secular trend shaping the future for everything from cars to home appliances to entertainment. And generative AI like ChatGPT opens far more possibilities. Thus, a good investment in generative AI is Microsoft, which found its next $1 trillion valuation in cloud computing in the 2010–2020 decade. It is now looking towards another trillion-dollar valuation in generative AI.

B for Bitcoin:

I would have said banks or buildings, but the U.S. commercial real estate market is not doing well. Instead of seeing a commercial REIT collapse, I would go for a Bitcoin ETF. Real estate is a relatively safe asset class. But decade-high interest rates paint a gloomy outlook for real estate companies that carry significant debt on their balance sheet. With the Bitcoin ETF, you get exposure to a new risky asset class that gives handsome rewards in a cyclical uptrend.

C for chips:

Running the entire digital show are semiconductors. And the ever-growing need for computing power makes chips the next oil of the digital revolution. The SMH ETF can give you competitive exposure to 25 top chip designers and manufacturers. Nvidia and TSMC make up for some of its top holdings. While the above two stocks and ETFs can give you exposure to a particular trend, the SMH can give you exposure to multiple secular trends like AI, autonomous cars, the Internet of things, 5G, drones, and robotics.

Investing tip

You can use SPY stock to stabilize your portfolio, and sector and commodity ETFs to maximize growth. At the same time, investing in a few no-brainer, large-cap stocks like Microsoft can make your diversification more fruitful.