In the face of innuendoes of annexation, Canadians are not backing off on a tectonic effort to lessen Canada’s reliance on the United States.
We’re buying more domestic goods, setting foot on U.S. soil less often, and restructuring our economy to kindle opportunities elsewhere.
But divesting from the U.S. stock market is problematic for Canadian retirement investors who need to diversify their portfolios. Over half of the world’s publicly traded companies are listed in the U.S., compared with less than three per cent in Canada. Even among that tiny sliver, roughly two-thirds of listed Canadian equities are natural resource or finance-related.
Canadian Prime Minister Mark Carney says the total amount Canadians have invested in the U.S. is approaching a trillion dollars; from big pension plans to mutual funds, to regular Canadians through their registered retirement savings plans (RRSP) and tax free savings accounts (TFSA).
If you are considering divesting from the United States as a patriotic act or concern over the long-term viability of the U.S. economy, and looking for opportunity in a transitioning Canadian economy, here are some things to consider.
Maybe home bias isn’t so bad
In the midst of a global trade war that has been raging since spring, Canada’s benchmark S&P/TSX Composite Index has advanced 24 per cent so far this year.
In comparison, the U.S. benchmark S&P 500 has advanced 13 per cent over the same period.
Energy and base-metal stocks are leading the Canadian rally; especially gold, which is seen as a safe haven while the dominance of the U.S. dollar comes into question.
When natural resource stocks rally, Canadian banks rally.
While U.S. stocks usually outperform Canadian stocks over longer terms the S&P/TSX has advanced 85 per cent over the past five years, compared with 91.5 per cent for the S&P 500.
That doesn’t change the fact that Canada’s stock market is heavily weighted toward natural resources, but there is at least one exception. Shares in Ottawa-based Shopify are up over 43 per cent so far this year and the e-commerce retailer is neck-and-neck with Royal Bank of Canada as the largest Canadian public company.
Industry Minister Melanie Joly says Canada needs more big companies as she rolls out a strategy to bolster key Canadian sectors. Manufacturing is expected to get a boost from military spending from Canada’s NATO commitments.
Earlier this month, the Canadian Space Agency (CSA), awarded $1 million in funding to the Canadian Space Mining Corporation (CSMC) to develop a low-enriched uranium nuclear reactor to be used on the moon.
Overseas opportunities beyond the U.S.
It can be a challenge to globally diversify a portfolio without some sort of U.S. component, but there are plenty of alternatives closer than the moon.
Unfortunately, most Canadian trading platforms only offer direct access to U.S. markets and purchasing individual stocks on overseas markets can be costly and complicated.
There are, however, several mutual funds and exchange traded funds (ETFs) that track stocks markets in just about any country or region that has a stock market.
There are also several funds that focus on specific global sectors with holdings all over the world.
It’s important for investors to know that fees for international funds can vary. International mutual funds can top three per cent of the amount invested each year.
Fees on index-linked, market-weighted ETFs are usually well under 0.5 per cent if purchased in U.S. dollars but are higher if they are hedged to the Canadian dollar.
Diversifying currencies and stocks can be tricky. A qualified advisor can help.
As Canada seeks bilateral trade agreements with countries including Mexico, India and Europe more opportunities could open outside the U.S. for Canadian investors.
