Balance Your TFSA: A Top Strategic Canadian ETF to Own

Is your TFSA too heavy in Canadian stocks? This Vanguard ETF could help balance it out.

Key Points
  • Home country bias is common among Canadians due to currency risk, tax treatment, and familiarity,
  • However, your employment income and home ownership already add hidden Canadian exposure.
  • VXC provides broad non-Canadian exposure at low cost, allowing you to strategically balance your TFSA.

A lot of Canadian investors have what’s called a home country bias inside their Tax-Free Savings Account (TFSA).

While Canadian stocks represent only about 3% of the global stock market, it’s not unusual to see Canadians with 25%, 50%, or even 100% of their portfolios invested domestically.

There are practical reasons for this beyond simple familiarity, which we’ll get into. But there’s also a flip side. Concentrating too heavily in one country can expose you to deeper drawdowns when that market underperforms.

If you’re looking to balance your TFSA more strategically, there’s one exchange-traded fund (ETF) that can complement a Canadian-heavy portfolio without overlapping it.

Canada day banner background design of flag

Source: Getty Images

Understanding home country bias

Home country bias refers to the tendency for investors to overweight stocks from their own country relative to the global market. Canadians do this for several logical reasons.

First, currency risk. When you buy U.S. or international stocks, you introduce foreign exchange exposure.

If the Canadian dollar strengthens against the U.S. dollar, your foreign holdings can lose value even if the underlying stocks perform well. If the Canadian dollar weakens, it can boost returns.

Over long periods, currency fluctuations tend to balance out, but in the short term, they can add volatility that has nothing to do with company fundamentals.

Second, taxes. Many Canadian investors don’t realize that U.S. dividends face a 15% foreign withholding tax, even inside a TFSA.

That tax is deducted at source and cannot be recovered in this account. Canadian dividends, by contrast, are not subject to foreign withholding, and in taxable accounts they benefit from the dividend tax credit.

Third, currency conversion costs. Buying U.S.-listed stocks or ETFs often requires converting Canadian dollars into U.S. dollars.

While brokerages have become more competitive, there is still friction in the process in the form of potential fees and spreads. Holding Canadian securities eliminates that extra step.

There’s also a less obvious layer. Your income is likely earned in Canadian dollars. If you own a home, that’s a real asset located in Canada. Even your job prospects are tied to the Canadian economy.

When you add it all up, many investors are already heavily exposed to Canada before they even look at their investment portfolio. Loading up further on Canadian stocks can amplify that concentration without you realizing it.

For all these reasons, a home country bias is understandable. But going too far can leave you underexposed to global growth.

How to complement Canadian stocks

If you already hold a substantial amount of Canadian equities, the cleanest way to diversify is to add something with zero overlap. One strong candidate is the Vanguard FTSE Global All Cap ex Canada Index ETF (TSX: VXC).

It’s a mouthful, but the strategy is straightforward. VXC holds thousands of stocks across international developed and emerging markets around the world, excluding Canada. That means no duplication with your domestic holdings.

This structure allows you to dial in your desired Canada-versus-rest-of-world allocation. Want 40% Canada and 60% global? You can achieve that simply by adjusting your mix of Canadian ETFs and VXC.

In classic Vanguard fashion, it’s cost-efficient, with a management expense ratio of just 0.22%. For broad global equity diversification, that’s a very reasonable price to pay.

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

Natural gas
Energy Stocks

A Perfect TFSA Stock: A 6.5% Payout Each Month

Peyto Exploration and Development is growing its dividend as natural gas fundamentals continue to improve.

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

Best Monthly Dividend Stocks on the TSX? My Top Picks for Today

Looking for monthly dividend income and an attractive growth profile? These two TSX stocks are my top picks today.

Read more »

A meter measures energy use.
Energy Stocks

Canadian Utilities vs. Hydro One: Which Dividend Stock Would I Hold for 15 Years?

A proposed merger changes the Canadian Utilities comparison, while Hydro One still requires price discipline.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, November 12

Rising natural gas prices could help TSX energy stocks extend their gains today, while falling oil, gold, and silver prices…

Read more »

pig shows concept of sustainable investing
Stocks for Beginners

How I’d Turn Quarterly Bank Dividends Into a Monthly Paycheque

Quarterly bank dividends can fund regular monthly transfers without choosing stocks for payment dates.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Energy Stocks

Retirees: How to Use Your TFSA to Earn an Average of $386 in Monthly Tax-Free Income

This TFSA strategy can help boost average returns while reducing risk.

Read more »

man studies at computer
Dividend Stocks

Here Are The 3 Canadian Stocks I’d Tell a New Investor to Buy ASAP

Discover strategies for investing in stocks that can help you thrive in a market filled with volatility and uncertainty.

Read more »

oil pumps at sunset
Dividend Stocks

Canadian Natural Resources vs. Suncor: The Dividend Stock to Own Through 2026

Let’s compare Canadian Natural Resources and Suncor Energy across their financial performance, dividend track records, growth prospects, and valuations to…

Read more »