Yes, You Should Buy U.S. Stocks!

I strongly believe that every Canadian investor should overweight U.S. stocks. Here’s why.

| More on:
Where to Invest?

Image source: Getty Images

Many Canadian investors exhibit what is known as a home-country bias, heavily weighting their portfolios with Canadian stocks despite the fact that Canada’s stock market accounts for only about 3% of the global market by weight.

It’s not uncommon to find Canadians who hold 30-50% of their investment assets in domestic stocks! This approach has never made sense to me.

While I understand the benefits related to qualified dividends and familiarity with the local market, with the generous tax advantages provided by Registered Retirement Savings Plans and Tax-Free Savings Accounts, these issues become less significant.

Today, I’ll outline three reasons why you should consider diversifying your portfolio to include U.S. stocks. Additionally, I’ll address some common objections and suggest two exchange-traded funds (ETFs) that make investing in the U.S. market straightforward.

It’s a big part of the global market

If you’re aiming to capture the long-term average return of the global market, it doesn’t make sense to exclude or underweight U.S. stocks, which currently comprise about 60% of it. By not sufficiently investing in the U.S. market, you’re potentially missing out on significant drivers of returns

Exposure to different sectors

The Canadian market is predominantly known for its strengths in the financial and energy sectors. However, by not diversifying into U.S. stocks, you’re missing out on significant exposure to other critical, innovative sectors such as technology, consumer discretionary, and communications.

You’re reliant on Canada

If you own property in Canada or earn your income here, your financial health is already heavily tied to the Canadian economy. This connection makes it even more critical to consider diversifying your investments into the largest economy in the world — the United States, especially if Canada goes downhill.

Overcoming objections to ETFs

“My brokerage charges me a lot to convert Canadian dollars (CAD) to U.S. dollars (USD).”

You don’t need to buy individual U.S. stocks directly. An ETF like Vanguard S&P 500 Index ETF is traded in CAD on the Toronto Stock Exchange and charges a low annual fee of just 0.09%. This way, you can invest in the U.S. market without worrying about currency conversion fees.

“What if the U.S. dollar depreciates?”

If you’re concerned about currency risk, an option like Vanguard S&P 500 Index ETF (CAD-Hedged) can protect you from fluctuations in the USD. This ETF hedges against currency risk, meaning it aims to neutralize the impact of currency movements between the CAD and the USD on your returns.

I heard Canadian ETFs holding U.S. stocks lose 15% of their dividends — is this true?”

Yes, it’s true that there’s a 15% withholding tax on dividends paid by U.S. companies to foreign investors, including those holding U.S. stocks through Canadian ETFs. However, it’s important to see the bigger picture — dividends on U.S. ETFs like VFV and VSP are relatively small, so the impact of this 15% tax isn’t as significant as it might seem. It’s not worth missing out on the diversification benefits over concerns about dividend withholding.

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 positions in Vanguard S&P 500 Index ETF and Vanguard S&P 500 Index ETF (CAD-hedged). The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

Dice engraved with the words buy and sell
Bank Stocks

TD Bank Stock: Buy, Sell, or Hold Now?

TD is out of favour with bank investors. Is this a contrarian opportunity?

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

How Much to Invest to Get $500 in Dividends Every Month

Are you looking for dividends each and every month? This stock is the right "choice" for you, providing stable passive…

Read more »

HIGH VOLTAGE ELECRICITY TOWERS
Dividend Stocks

Dividend Investors: Top Canadian Utility Stocks For June

Here are three of the top Canadian utilities stocks long-term investors may want to consider as portfolio staples moving forward.

Read more »

data analyze research
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Two stocks paying monthly dividends are excellent options for income-focused investors looking to increase their passive-income streams.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Invest $7,000 in This Dividend Stock for $519 in Passive Income

A $7,000 investment in this top dividend stock could generate over $519 annually in passive income.

Read more »

Group of people network together with connected devices
Tech Stocks

3 Canadian AI Stocks That Are Minting Coin in 2024

AI stocks like Kinaxis Inc (TSX:KXS) are outperforming the TSX.

Read more »

growing plant shoots on stacked coins
Dividend Stocks

3 Stocks Ready for Dividend Hikes in 2024

These three stocks are not only primed to increase their dividends again this year; they are three of the best…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Add These 6 Undervalued Stocks to Your TFSA Before Prices Pick Back Up

These six undervalued stocks are perfect for those seeking massive passive income for your TFSA, and prices are about to…

Read more »