Canadian content gets a failing grade. How much is too much? And should you care?
Canadian content gets a failing grade. How much is too much? And should you care?
Ever since the Canadian dollar became a floating currency (for the second time) in 1970, the subject of home-country bias has been on the minds of advisors and investors alike. Although Canada represents a miniscule portion of the world’s market capitalization, we as Canadians spend most of our discretionary income in Canadian dollars.
Therefore, as a matter of convenience, not to mention avoiding the currency game, many of us avoid allocating too much beyond our borders and when we do, we might buy ETFs and mutual funds hedged to the Canadian dollar.
Additionally, although not a factor these days, is the former restriction on foreign content that limited investments outside Canada to 30% of an RRSP. In place until the 2005 federal budget eliminated the restrictions altogether, it’s possible some portfolios are only now reflecting a more international flavour.
But it’s definitely an issue that cuts both ways.
If you’d held 100% of your portfolio in the iShares Core S&P/TSX Capped Composite Index ETF in the five-year period between 2004 and 2009, you’d have walked all over the SPDR S&P 500 ETF, despite a 19% increase in the value of the greenback in 2008 compared to the Canadian dollar. Since 2009, the same held true for the SPY.
So, clearly there are times when being overweight Canadian equities pays dividends.
Vanguard’s 2014 report discussing home bias and diversification makes it very clear that investing 59% of our investment assets in Canadian stocks when our market-cap weight is just 3.6% of the global market cap is a losing proposition.
Especially when you consider that Canadian equities are biased towards energy and financial companies. Case in point: when the XIC lost 2.2% on Monday, the SPY was off just 0.7%. The difference? The XIC has 24% of its assets invested in energy compared to 8% for the SPY.
In future articles we’ll look to Alberta advisors for strategies their using to minimize the negative effects of oil prices and home-country bias.
One thing’s for sure. With ETF providers creating a number of new global funds in the Canadian marketplace, there’s no excuse for advisors being caught off guard.
Ever since the Canadian dollar became a floating currency (for the second time) in 1970, the subject of home-country bias has been on the minds of advisors and investors alike. Although Canada represents a miniscule portion of the world’s market capitalization, we as Canadians spend most of our discretionary income in Canadian dollars.
Therefore, as a matter of convenience, not to mention avoiding the currency game, many of us avoid allocating too much beyond our borders and when we do, we might buy ETFs and mutual funds hedged to the Canadian dollar.
Additionally, although not a factor these days, is the former restriction on foreign content that limited investments outside Canada to 30% of an RRSP. In place until the 2005 federal budget eliminated the restrictions altogether, it’s possible some portfolios are only now reflecting a more international flavour.
But it’s definitely an issue that cuts both ways.
If you’d held 100% of your portfolio in the iShares Core S&P/TSX Capped Composite Index ETF in the five-year period between 2004 and 2009, you’d have walked all over the SPDR S&P 500 ETF, despite a 19% increase in the value of the greenback in 2008 compared to the Canadian dollar. Since 2009, the same held true for the SPY.
So, clearly there are times when being overweight Canadian equities pays dividends.
Vanguard’s 2014 report discussing home bias and diversification makes it very clear that investing 59% of our investment assets in Canadian stocks when our market-cap weight is just 3.6% of the global market cap is a losing proposition.
Especially when you consider that Canadian equities are biased towards energy and financial companies. Case in point: when the XIC lost 2.2% on Monday, the SPY was off just 0.7%. The difference? The XIC has 24% of its assets invested in energy compared to 8% for the SPY.
In future articles we’ll look to Alberta advisors for strategies their using to minimize the negative effects of oil prices and home-country bias.
One thing’s for sure. With ETF providers creating a number of new global funds in the Canadian marketplace, there’s no excuse for advisors being caught off guard.
