Canadians are shedding their much-maligned home bias, but they're still well above the 30 per cent that Vanguard says strikes the right balance
Canadian investors are often called out for their home bias. Canada represents just 3 per cent of the total market capitalization in global equities, yet Canadians on average hold over 50 per cent Canadian equities. We’re frequently told that this overweight to Canada is holding our performance back, leaving us overexposed to those standby Canadian sectors of energy, financials, and natural resources and underexposed to massive growth areas like technology or healthcare.
Advocates for greater diversification may then be heartened to learn that Canadians are allocating away from Canada. According to global research on home bias in developed markets conducted by Vanguard, Canadians have trimmed their home bias from a 67 per cent allocation to Canadian equities in 2012 to a 50 per cent Canadian allocation in 2024. Canadians have shed their home bias at a faster rate than their Australian, Japanese, or American counterparts. However that 50 per cent average still sits well above what Vanguard sees as the ideal level of home bias: 30 per cent.
“30 per cent leads to the lowest variability. A 30/70 allocation is the minimum variance portfolio,” says Ashish Dewan, portfolio consultant and product specialist at Vanguard and one of the authors of the report. “There’s also Canadians’ preference for the familiar and the deeper understanding it brings. There’s also some tax benefits for investors seeking higher distributions because Canadian stocks tend to have a higher distribution rate.”
That combination of familiarity, distribution rates, and tax incentives are some of the core reasons that Canadians still have such a strong home bias — according to Dewan. That bias, however, has resulted in more significant sector concentration with Canada’s leading sectors taking up an outsized share in Canadian portfolios. Compared to global markets, Canada tends to be highly concentrated. Even as US stocks come under scrutiny for their growing concentration in a few names, Dewan says that US markets offer far more broad sector and subsector diversification than Canada does.
That concentration, Dewan says, could have contributed to lower risk-adjusted returns. It also leaves Canadians more exposed to risks associated with divergent central bank policy and geopolitical risk.
The downturn in Canadian home bias, however, represents a recognition by investors that they are overexposed to certain risks through their overweight to Canadian equities. Some of that shift away from Canada, however, can also be explained by the remarkable outperformance of US equity markets. Dewan speculates that most of Canadian investors’ allocation away from Canada has been an allocation to US equity markets.
There has also been a huge degree of innovation in investment tools and vehicles over the past 12 years. Canadians have more ETFs and other investment funds designed to access specific niche markets or specific investment strategies. DIY investing has also become more popular, with many younger Canadian investors allocating more globally and agnostically. However, Dewan cautions against DIY investors overestimating their skills. He says that the focus around home bias should largely be one based on best practices and principles. He believes a 30 per cent allocation to Canada and a 70 per cent global allocation can offer a principled, low-variation approach.
As advisors talk to their clients about any existing home bias they may have, Dewan thinks that global context and an understanding of the strategic value of Canadian assets are crucial considerations that need to be mentioned.
“Canadian stocks are a small percentage of global markets, around 2.7 per cent. So there should be a specific case to overinvest,” Dewan says. “The way advisors could educate some of their clients is through the concept of volatility. Returns are a weighted average, and standard deviation is not a weighted average because lower correlations impact standard deviation. So when you have Canadian markets and global markets, we’ve found that the ideal mix for weathering the ups and downs of the market is that 30 per cent allocation to Canada.”
