Canadian Stocks vs. Global ETFs: What New Investors Should Understand

Here’s how you can use global ETFs alongside your Canadian stocks to diversify your finances and build a reliable long-term portfolio.

Key Points
  • Beyond Canadian Borders for Diversification: While Canadian stocks offer a strong foundation, diversifying with global ETFs like iShares Core S&P 500 (TSX:XUS) and MSCI Emerging Markets (TSX:XEC) provides access to broader markets and industries, mitigating risks tied to the Canadian economy.
  • Understanding True Diversification: Even diversified Canadian industries can be heavily reliant on the local economy, so it's beneficial to understand the global operations and influences on Canadian companies and seek additional growth channels.
  • Global ETFs Complement Canadian Investments: Combining global ETFs with targeted Canadian stocks, such as Hydro One for its reliable income and growth potential, allows you to balance diversification with the specific growth or income profiles you seek.

There’s a good reason why Canadian stocks are often the first names new investors consider when they start building a portfolio. Canada has a tonne of high-quality businesses to choose from, and it makes sense to start with companies you already know.

However, even if you own several Canadian stocks across different industries, you could still be missing out on plenty of opportunities elsewhere in the world. Not only that, but investing only in Canada can leave you exposed to risks you might not notice until too late.

That’s why global ETFs can be so valuable, especially when you’re just getting started and want broader exposure without having to research companies in several different countries.

And the best part is that you can combine the two, using ETFs to reach more markets while still choosing high-quality Canadian stocks based on the businesses and long-term opportunities you want more exposure to.

Canada day banner background design of flag

Source: Getty Images

Different Canadian stocks can still depend on the same economy

One of the first things new investors should understand is that you don’t want your entire portfolio depending on one company or industry.

For example, Canadian Tire, Hydro One (TSX: H) and Canadian Apartment Properties REIT are three high-quality stocks that would give you exposure to retail, utilities and rental housing.

However, while those three businesses offer diversification across different sectors of the economy, a significant part of their operations still depends on customers and assets here in Canada. 

So, although you have some diversification, you’re still heavily exposed to Canada. That matters because different economies can grow at different speeds, and some of the most attractive businesses and industries to invest in are much larger outside Canada.

Plus, if your employment income comes from Canada and you own a home here, you’re already financially tied to the Canadian economy in other ways, so investing in businesses operating abroad can give you another way to spread that risk.

You’ll also want to look at where a company actually operates, since some Canadian stocks already earn much of their revenue internationally.

For example, Bombardier earns almost all its revenue outside Canada, but much of its workforce and manufacturing operations are still based here. So, even though it sells its planes around the world, Canadian labour costs and manufacturing conditions can still have a significant impact on its business.

That’s why the goal is to understand what you’re buying and give your portfolio several different ways to grow, rather than assuming that owning Canadian stocks across several industries gives you all the diversification you need.

Global ETFs make it easier to invest beyond Canada

When you’re looking to diversify outside of Canada, one of the best ETFs to start with is the iShares Core S&P 500 Index ETF (TSX: XUS), which gives you exposure to roughly 500 of the largest publicly traded U.S. companies through one simple investment.

You get major technology businesses alongside healthcare companies, banks, consumer staples and more, adding several different ways for your portfolio to grow beyond the Canadian businesses you already own.

And if you want to spread that exposure beyond the United States too, the iShares Core MSCI Emerging Markets IMI Index ETF (TSX: XEC) owns thousands of stocks across emerging markets without you needing to pick individual companies yourself.

Both funds trade on the TSX in Canadian dollars, making them straightforward to buy alongside your Canadian stocks.

With that broader exposure in place, you can then choose Canadian stocks based on the specific opportunities you want more of, whether that’s dividend income or significant long-term growth.

Hydro One, for example, can be an ideal addition if you want reliable income alongside those other growth opportunities. Its regulated utility operations generate highly predictable revenue and cash flow, while Ontario’s expanding electricity needs give it significant long-term growth potential too.

So, adding global ETFs doesn’t mean overlooking some of the best Canadian stocks. It just means spreading your financial exposure across more countries while continuing to own high-quality Canadian names like Hydro One that can keep growing and paying you more for years.

Fool contributor Daniel Da Costa 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.

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