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.

| More on:

Source: Getty Images

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.

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.

More on Investing

Canadian Dollars bills
Dividend Stocks

Cash-Rich Canadian Companies That Thrive in Economic Downturns

Want cash in your pocket? Then you want companies that are flush with the stuff.

Read more »

up arrow on wooden blocks
Dividend Stocks

The Power of Compound Interest: Growing Your Wealth From Modest to Magnificent

The power of compound interest combined with starting early, contributing consistently, and selecting quality investments can help you grow your…

Read more »

Redwood trees stretch up to the sunlight.
Retirement

3 Canadian Growth Stocks I’d Buy and Hold in a TFSA Forever

These stocks have the potential to outperform the broader market with their returns. Using the TFSA can further amplify your…

Read more »

customer uses bank ATM
Tech Stocks

2 Canadian Bank Stocks to Shield Against Market Downturns

Anchor your portfolio with dividends and stability built to outlast trade war turbulence with Royal Bank of Canada (RBC) and…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

2 High-Yield Dividend ETFs to Buy to Generate Passive Income

These two high-yield dividend ETFs are some of the best long-term investments that Canadians can make to boost their passive…

Read more »

grow money, wealth build
Dividend Stocks

In Search of Consistency? Try 3 Stocks Whose Dividends Keep Growing

These three stocks are excellent buys in this uncertain outlook due to their consistent dividend growth.

Read more »

Stethoscope with dollar shaped cord
Dividend Stocks

Got $4,000? 4 Healthcare Stocks to Buy and Hold Forever

These healthcare stocks may not sound exciting, but the future growth opportunities certainly are.

Read more »

rising arrow with flames
Stocks for Beginners

Buy and Hold These 2 TSX Stocks for Unstoppable Long-Term Gains

These two top TSX stocks could help patient investors earn solid returns in the long run.

Read more »