Canadian Retirement Investors Hit as Canadian investment portfolios are 18 times overweight in their Canadian holdings, increasing exposure to domestic risks and decreasing exposure to opportunities outside the country.
Canadian securities make up half of Canadian portfolios, despite only accounting for 2.6% of the global market. The top ten holdings in Canada make up over 38% of the S&P/TSX index.
Canadian Investors’ Portfolio Balance
- Gradual reduction in home bias from 67% in 2012, likely due to restrictions on foreign holdings in RRSPs and TFSAs.
- No foreign content restrictions on RRSPs or TFSAs.
- Vanguard recommends a balanced portfolio of 30% Canadian equities and 70% international equities.
- Weighting may vary for individuals spending more outside Canada.
Global Diversification in Canadian Portfolios
- Importance of diversifying portfolios beyond Canada and among foreign holdings.
- Three basic ways for retail investors to access foreign equities.
- Hidden risk of dealing in foreign currencies: higher cost of dealing in Canadian dollar.
- Best to buy foreign equities in U.S. dollars to avoid currency traders.
- Bank U.S. dollars in trading accounts like RRSP and TFSA.
Canadian Mutual Funds Overview
- Offer a variety of global and international funds.
- Managed by investment teams with extensive research capabilities.
- Some funds are sub-managed by firms in specific geographic regions.
- Annual fees for these services can be 2%-3% of the total investment.
Global Exchange-Traded Funds (ETFs) Overview
- Vanguard Canada, a leading provider of ETFs, is promoting global diversification.
- ETFs have similar geographic and sector reach as mutual funds but are passively managed.
- ETFs are less effective at adjusting to changes in specific foreign markets.
- Unhedged foreign ETFs have lower fees than mutual funds, often below 0.05 per cent annually.
- Market-weighted ETFs track an index, providing more transparency.
U.S. Listed Stocks Overview
- Canadian trading accounts provide full access to major U.S. exchanges.
- U.S. equities are global equities, with approximately 50% of all publicly traded companies based in the U.S.
- Many U.S. companies generate global revenue and earnings, giving investors a global reach.
- Companies are obligated to hedge all foreign currencies.