Why Canadian Investors Should Consider Investing in U.S. Stocks

Written by Tony Dong, MSc, CETF® at The Motley Fool Canada

Having a strong preference for Canadian stocks is not uncommon among local investors, and in some cases it is perfectly rational.

For example, it makes sense to avoid currency conversion fees and take advantage of the tax benefits offered by Canadian dividends.

However, if your portfolio is heavily weighted toward Canadian stocks simply out of patriotism or familiarity, you may be missing out on broader opportunities.

Despite the convenience of investing from home, there are good reasons to diversify your investments, particularly towards the US market, which is the largest and most liquid in the world.

Here’s a deeper look at why expanding your investment horizon to include U.S. stocks is a strategic move, as well as an exchange-traded fund (ETF) that I personally like for its easy access to the U.S. market.

Sectoral diversification

Sector diversification is an important issue when comparing the Canadian stock market to its American counterpart, mainly due to the outdated composition of our local market.

In Canada, the predominant sectors are energy and finance, specifically oil companies and banks. Unfortunately, our energy sector often faces restrictive government policies and our banking sector, despite its size and stability, shows little innovation and remains largely unchanged over the years.

In contrast, the U.S. market is a hotbed of innovative companies, particularly in technology and health care. Even U.S. financial institutions dwarf Canadian banks in terms of balance sheet and breadth of services.

If you limit your investments to Canada, you are playing a kind of monopoly game: you are betting on real estate, railroads, banks and utilities. This strategy may seem safer, but it is terribly outdated.

60% of the world stock market

Another compelling reason to consider diversifying your investments into U.S. stocks is the magnitude of opportunities you miss by focusing too much on Canada.

The story continues

When we look at global market capitalization, Canada represents just 3% of the MSCI World IndexThis figure pales in comparison to the United States, which accounts for 70% of the index.

This disparity is key to understanding market exposure. If, for example, your portfolio is 60% Canadian stocks, you are overweighting Canada by nearly 20 times its global market presence.

While a 30% allocation (about 10 times its global weight) may be more reasonable, an excessive focus on Canadian stocks can significantly limit your investment opportunities and potential returns.

The ETF to use

For affordable and broad exposure to the US market, I like ETF Vanguard US Total Market Index (TSX: VUN).

This ETF perfectly embodies what its name promises: it holds a broad portfolio of over 3,500 US stocks of all market capitalizations: small, mid and large. It includes stocks from all 11 sectors, thus offering a comprehensive share of the US market.

In terms of fees, VUN offers a competitive price with a management expense ratio of just 0.16%.

That means that for every $10,000 invested in the ETF, the annual fee would be just $16, a small price to pay for such broad diversification in the best-performing U.S. market.

The article Why Canadian Investors Should Consider Investing in U.S. Stocks appeared first on The Motley Fool Canada.

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Further reading

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.

2024