Canadian investors naturally tend to have some home country bias, and that is not always a bad thing. There are legitimate advantages to owning Canadian stocks, such as tax efficiency and lower currency risk.
Many investors feel more comfortable owning businesses they recognize, use regularly, and understand. Canada also has several strong sectors, including banks, pipelines, railways, and energy infrastructure.
Still, too much home country bias can become a problem. Canada is only a small part of the global equity market, yet many Canadians hold portfolios heavily concentrated in domestic stocks. That creates sector concentration risk, especially in financials, energy, and commodities, and causes you to miss sectors the Canadian market lacks, such as technology.
It is also worth remembering that many Canadians already have substantial economic exposure to Canada outside their investment portfolios. Your employment income is likely tied to the Canadian economy. If you own a home or investment property, your real estate exposure probably is, too.
Concentrating your investment portfolio heavily in Canadian stocks on top of that can unintentionally stack even more of your financial future onto a single country and economy.
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What XAW does
One of the easiest ways to balance that out is by owning one exchange-traded fund (ETF) that holds the entire world outside Canada, essentially. That is what iShares Core MSCI All Country World ex Canada Index ETF (TSX: XAW) does.
XAW tracks a globally diversified portfolio of developed and emerging market stocks outside Canada using underlying index funds. That gives investors exposure to thousands of companies across the United States and in developed and emerging international markets. You get small, mid, and large-cap stocks along with exposure to all 11 market sectors.
The fund charges an expense ratio of 0.22% and currently offers a trailing 12-month yield of 1.2%. Over the trailing 10-year period with dividends reinvested, XAW has delivered a solid 12.94% annualized return.
How much Canada should you hold?
For Canadian investors already holding domestic stocks elsewhere, XAW can be an efficient diversification tool. In a Tax-Free Savings Account (TFSA), XAW can be a simple way to build global diversification around an existing Canadian core.
Personally, I think pairing XAW with a moderate Canadian stock allocation often makes the most sense. Many all-in-one ETFs keep Canadian equities around 20% to 30% of the portfolio.
That gives you some home country exposure without letting Canada dominate the entire account. Of course, you can adjust this however you wish, but it’s best not to tinker too much once your allocation is set beyond annual rebalancing.
