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.
