Pros and cons of investing only in Canada

By Mark Seed, myownadvisor

Special to Financial Independence Hub

There are certainly pros and a few cons when investing in just Canada…

Given it’s “tax season” and tax refund season for some, I shared my ideas related to managing your tax refund this year.

Thanks to Rob Carrick The Globe and Mail, who mentioned my post in his column: Look what’s happened to the cities with average $1-million home prices (subscription).

“Housing has definitely come down in cost since 2022. The average price of a resale home in February 2024 was $685,809, 16 per cent below the peak average of $816,720 in February 2022. Still, prices in several of the million-dollar cities have held up well.”

Rob mentioned this post: where to put your cash right now.

For the most part, if you’re not earning at least 4% on most of your cash these days you’re falling behind…

Weekend Reading – Pros and cons of investing in just Canada

Pros and cons of investing in the Canadian vs. U.S. stock market.

I’ll let you read that 5i post for more insights but the punchline from Chris White’s article is something that resonated with me (and always has):

“The US stock market is home to an extensive array of publicly listed companies, and with thousands of stocks available, navigating this vast landscape can be overwhelming. Investors must decide which companies to research, analyze, and potentially invest in. The sheer volume of options can lead to decision paralysis. It is vital that investors understand a company’s financials, growth prospects, and management quality.”

The U.S. market is a challenging space to pick stocks, if your goal is to beat the market.

Conversely, Canada tends to run on oligopolies — a few moaty stocks in some key sectors more than not.

You have our big-6 banks.
You have a few major telcos. You know the names.
You have a few major utility companies. You can count them on two hands.

The list goes on.

Beating the TSX (BTSX) can happen but it’s certainly not guaranteed nor consistent owning higher-yielding stocks.

Investing in our oligopolies, in theory, is the concept behind the 6-Pack (or 12-Pack) Canadian Portfolio which can work well at times:

Own a few Canadian large-cap stocks from key sectors for growth and income.
Own such companies for a long period of time because they enjoy a competitive advantage in Canada: since all things being equal, a moaty firm should offer shareholders a higher, sustainable, competitive advantage than companies with smaller moats or no moats at all; scrambling for market share.

In recent years, for the latter, I’m eating more of my own cooking.

Thank goodness, since many Canadian blue-chip stocks are suffering while the U.S. market has been thriving.

via GIPHY

When it comes to the U.S. selections, I’ve sold off many U.S. dividend kings in my portfolio like JNJ and instead used the proceeds to buy other U.S. stocks or low-cost ETFs that I believed (at the time) could deliver more value.

So far, I’ve been right…including with BRK.B and QQQ but the financial future is always very cloudy.

I mean, it’s only been a year or so since I’ve sold all JNJ stock and added to those existing names I’ve held for a few years….that’s hardly a successful career change.

Every stock or ETF seems like a great idea until it’s not.

And not all ETFs are created equal…far from it.

I read in October 2023, in just that month alone, the Canadian market experienced a notable surge in new ETFs: 37 of them coming to market.

37??

Here are some examples:

Should you invest in the Dynamic Active Global Equity Income ETF (DXGE-T)?
What about owning some Purpose Active Conservative Fund (PACF-T)?
There is also the Hamilton Technology Yield Maximizer ETF (QMAX-T)…and let’s not forget,
The BMO US Equity Accelerator Hedged to CAD (ZUEA-NE) that uses 2x leverage on an equally weighted bank strategy and hedged S&P 500, respectively.

Oh boy.

Long gone are the days (??) from March 1990, when the Toronto Stock Exchange listed the Toronto 35 Index Participation Fund. The fund tracked the TSX 35 index under the ticker symbol “TIPs.”

You might know this ETF better today as: iShares S&P/TSX 60 Index ETF (XIU).

Thankfully, XIU is still around and doing well overall as long as you have a long-term time horizon.

Since the launch of TIPs, the Canadian ETF market has seen remarkable growth with over 1,000 ETF available to retail investors today. Source: my friends at https://cetfa.ca/. @cetfassn

While some niche ETFs can offer (and have delivered) great returns, the majority of them are not worth owning IMO. Investing risk taken doesn’t always translate to rate of return rewards.

Pros and cons of investing in just Canada

Give or take, Canada’s economy makes up just 3-4% of the world’s investing markets – so putting all your investing eggs into just Canada immediately eliminates most of the investing world on purpose. In doing so, you are shrinking your investing universe. Especially on the growth side.

Mind you, returns from Canada have hardly been bad over long investing periods which makes any Canadian home bias somewhat effective – at least historically.

Through dot-com booms and busts, The Great Financial Crisis, and a global pandemic, equity returns for XIU remain solid at the time of this post earning DIY investors over 7% annualized since inception and just over 8% for the last 10-year run.

Would Warren Buffett Be Happy With A 7-10% Return?

“The answer to that would be yes.”

I argued years ago it was never a better time to be a DIY investor including investing in Canada’s moaty stocks.

As I’ve matured as an investor (i.e., get older too!) I’m just mindful that while Canada has been a great place to invest (and will likely continue to be long-term) other options remain attractive and available for higher growth.

Beyond the pros and cons of investing in just Canada

Related to this theme, Dale Roberts wrote about the cost of your Canadian home bias – still relevant a few years later…

Reader email of the week (adapted slightly for the site):

“Hi Mark – looking at what is going on here…. really did not see sentiments getting this bad on BCE. I think T (Telus) is also caught in the downdraft but “Big Compounding Engine” (BCE) has me concerned – and now below my cost for the first time ever. Wondering what you are doing?”

Love the question, thanks for that!

The short answers are:

Not selling any BCE or Telus now. Staying invested.
Not actively buying any BCE or Telus. Instead, putting more money into low-cost XAW, QQQ and other U.S. assets (see more BRK.B above over the last year) when I have the money to do so.

Readers might recall I maxed out my/our TFSAs in 2024 (this year) with XAW.

Dan Kent over at Stocktrades.ca highlighted some of the Best TSX ETFs to own. Nice to see they included low-cost XIU as well among others.

Well said by Doug:

Fans of my site, MoneySense, wrote an inspirational post for younger investors: how to save (and invest) your first $100,000.

“Saving and investing $100,000 is a popular finance goal for Canadians. Thankfully, with growth and compound interest, it’s not out of reach.”

I can attest that was a huge milestone for us to pass back in our 30s.

I like having fun with my stock market predictions. Here are mine for 2024.

Honest Math enjoys the same good fun. @honest_math

Mark Seed is a passionate DIY investor who lives in Ottawa. He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on April 6, 2024 and is republished on the Hub with his permission.