Owning an exchange-traded fund (ETF) can feel like finishing the diversification job in one purchase. You have a long list of companies, a familiar ticker, and no need to choose tomorrow’s winning stock. Sounds perfect, right?
The list can still lean heavily towards the same part of the economy. Canadian banks are large businesses, so funds tracking Canada’s market naturally give them significant space. Adding several bank shares beside the fund can make that concentration greater than it first appears.
This isn’t a reason to abandon Canadian investing. It is a reason to understand what the fund owns before assuming the number of holdings tells the whole story. Hundreds of names can still share several important risks.
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A list isn’t a balance
Many broad indexes give larger companies larger weights. When banks become more valuable relative to other businesses, a fund tracking that index generally gives them more influence. That can happen without the fund manager making a fresh bullish decision about lending.
Financial-sector exposure also includes businesses beyond banks, such as insurers and investment firms. Calling the whole sector weight a bank weight would overstate the amount in lenders. The holdings and the sector categories answer related but different questions.
The iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC) illustrates the Canadian-market approach. It provides exposure across domestic listed companies, but it isn’t designed to make every industry equally important. It follows the shape of the index.
Count what you already own
Suppose a hypothetical Canadian fund holds 30% in banks. A $20,000 investment would provide $6,000 of bank exposure. Add $10,000 of individual bank shares and the combined $30,000 portfolio now has $16,000, or about 53%, in banks.
That example isn’t a current XIC weight. It shows how a diversified fund and a familiar stock can combine into a concentrated portfolio. Buying the stock in a different account doesn’t change the total exposure.
Royal Bank of Canada (TSX: RY) is an excellent example of a business worth owning without letting it dominate everything. Its lending, wealth management, and other services provide several earnings sources. The latest fiscal third-quarter adjusted earnings rose 11% to $4.28 a share.
That growth supports the case for the company. It doesn’t make RBC independent of Canada’s credit cycle, financial markets, or customer confidence. Owning several banks can spread company-specific problems while leaving shared economic risks quite large.
Add something different
The iShares Core MSCI All Country World ex Canada Index ETF (TSX: XAW) offers a straightforward complement. It provides exposure to developed and emerging markets outside Canada. That brings different businesses and customers into the plan through a Canadian-listed fund.
I like that role beside a Canadian allocation. XAW still has substantial U.S. exposure, market risk, and currency exposure. It also contains financial companies, so adding it won’t eliminate every industry overlap. Its benefit is a wider collection of economies and earnings sources.
New contributions can gradually improve the balance without requiring an immediate sale of every familiar holding. For example, adding $10,000 outside the hypothetical bank allocation above reduces its share from about 53% to 40%, assuming values otherwise stay unchanged.
The appropriate balance depends on the whole household’s savings, including pensions and other accounts. A Canadian home and Canadian employment already connect much of everyday wealth to the domestic economy. Investments can provide a useful opportunity to reach further.
Bottom line
I’d keep a good Canadian fund and attractive bank holdings, then use broader exposure to complete the investment portfolio. The aim is to give your savings several ways to earn. A familiar dividend stock can remain valuable without being responsible for most of your future. Diversification works best when the businesses differ as much as the ticker symbols.
