Missing Out Is Costly: Why the Smartest Investors Keep Buying Canadian Stocks

Here’s why you should continue to include a decent allocation to domestic equities.

Tony Dong, MSc, CETF®

Tony turned a series of 2017 marijuana stock losses into a freelance career advocating for ETF investing. He currently holds a Master’s in Risk Management from Columbia University and is a Certified ETF Advisor (CETF®). Tony is the founder of ETF Portfolio Blueprint (etfportfolioblueprint.com) and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE. His analysis has also been featured in publications like Kiplinger, 24/7 Wall St., U.S. News & World Report, TheStreet, and Benzinga.

Published February 12, 2025 9:30 am EST

They might be competitors, but the Canadian divisions of the world’s largest asset managers—Vanguard, BlackRock, and Fidelity—all do the same thing when constructing their asset allocation exchange-traded funds (ETFs): they overweight Canadian stocks.

While Canadian equities make up just 3% of the global market by capitalization, these asset allocation ETFs typically allocate 20-30% to Canada—up to a 10-fold overweight compared to its actual size in the world market.

What gives? Why is smart money structuring model portfolios this way? Here are a few reasons why—and an ETF to copy their approach.

It lowers currency risk

If you felt sick watching the Canadian dollar slide against the U.S. dollar throughout 2024 and into this year, this is exactly why smart investors overweight Canadian stocks.

That feeling is called currency risk. When you invest in foreign stocks or ETFs priced in another currency, you’re not just betting on the companies—you’re also exposed to fluctuations in the exchange rate.

Over time, currency swings can add volatility to your returns, especially if most of your wealth and spending is in Canadian dollars, but your investments are in U.S. dollars.

By keeping a reasonable overweight to Canadian stocks, you reduce this risk. A small shift toward domestic investments can help stabilize your portfolio and protect against unpredictable currency movements.

It improves tax efficiency

Older investors who have maxed out their registered accounts, like a Tax-Free Savings Account (TFSA), will appreciate this point in particular. In a non-registered account, tax efficiency matters. You pay tax on dividends and when you sell investments for capital gains.

The advantage of Canadian stocks is that their dividends are taxed more efficiently. Thanks to the eligible dividend tax credit, Canadian dividends receive preferential tax treatment, meaning you keep more of your income compared to foreign dividends.

With U.S. and international stocks, there’s no such break—you pay full tax on dividends, and for U.S. stocks, there’s an additional 15% withholding tax at the source before the dividend even lands in your pocket.

Historically, having an overweight to Canadian stocks has helped ensure that after taxes, overall net performance is stronger, making them a smarter choice for taxable accounts.

How to put this in play

If you’ve read these points and realized you might have little to no Canadian stock exposure, you can fix that easily with BMO S&P/TSX Capped Composite Index ETF (TSX: ZCN).

This ETF tracks over 200 small-, mid-, and large-cap Canadian stocks, with a natural bias toward financials and energy, reflecting the makeup of the Canadian market.

Right now, ZCN pays a 2.72% yield, with monthly distributions, and charges a rock-bottom 0.06% expense ratio, making it one of the cheapest ways to gain broad exposure to Canadian stocks.