Why Canadian Investors Are Flocking to Global ETFs

Dots over the earth connecting the world

It’s a well-documented phenomenon: Canadian investors often showcase a distinct “home country bias,” meaning their portfolios are heavily tilted towards Canadian stocks. On the surface, this inclination has its merits.

By holding Canadian stocks, investors can enjoy advantages like favourable tax treatments on dividends and a reduction in currency risk since investments are denominated in Canadian dollars.

But is there such a thing as too much of a good thing? While patriotism in investing can feel comforting, it’s worth noting that Canada represents a mere 3% of the global stock market.

By overconcentrating in domestic stocks, investors could be missing out on the growth potential and diversification benefits that international markets offer.

Whether it’s the technological prowess of the U.S., the rapid growth of emerging markets like India and China, or the stability of European blue chips, diversifying across borders can be a hedge against potential stagnation in the Canadian market.

With this perspective, it’s no wonder more Canadian investors are broadening their horizons, turning to global exchange-traded funds (ETFs) to capture opportunities beyond their home turf. Here’s my favourite ETF for doing so.

What are global equities?

The global equity market is vast and varied, and for the sake of understanding and categorization, it’s typically structured into three main segments: U.S., developed, and emerging markets.

  1. U.S. market: This refers to the stock market of the United States. Given the size and influence of the U.S. economy, its equity market often stands distinct from others. Companies listed here include some of the world’s largest and most recognized brands and corporations.
  2. Developed markets: These are countries with more mature economies and established stock markets, but outside of the U.S. Examples include:
    • Europe: Countries like the United Kingdom, Germany, France, and Switzerland.
    • Asia-Pacific: Nations such as Japan, Australia, and Hong Kong.
    • Other: Regions like Canada and New Zealand also fall under this category.
  3. Emerging markets: These are nations with economies that are in the process of rapid industrialization and experiencing higher-than-average growth rates, albeit with higher volatility and risk. Key countries in this segment include:
    • Asia: Countries like China, India, and South Korea.
    • Latin America: Nations such as Brazil, Mexico, and Argentina.
    • Other regions: Include countries like Russia, South Africa, and Turkey.

How to invest globally

An ETF like iShares Core MSCI All Country World ex Canada Index ETF (TSX:XAW) is perfect for investors trying to capture the global equity market. This ETF holds thousands of U.S., developed, and emerging market stocks, all for a low 0.22% expense ratio.

As its name suggests, XAW excludes Canadian stocks. This is a good feature, as it allows you to customize the Canadian side of your portfolio to your liking with either a Canadian equity ETF or some select dividend stock picks (and the Fool has some great recommendations for those below).

The post Why Canadian Investors Are Flocking to Global ETFs appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.