Yahoo Finance Too much TSX? Vanguard says Canadians need foreign stocks to cut risk
Analyst says 30% is the right level of Canadian exposure
Canadians are patriots when it comes to picking stocks, leaving portfolios short on global exposure needed to reduce risk, according to Vanguard Investments Canada.
Using data from the International Monetary Fund, Vanguard found Canadian investors put over half (55.6 per cent) of their stock portfolio into domestic shares, about 16 times overweight, given Canada's 3.4 per cent share of the MSCI All Country World Index. Senior investment strategist Bilal Hasanjee says 30 per cent is the right level of Canadian exposure, with the remainder focused on international stocks.
"[Canadian] investors are exposed to a considerable amount of risk that could have been diversified away," he said in an interview with Yahoo Finance Canada. "It's the preference for the familiar."
Home bias is a global phenomenon, with investors in Australia, Japan, and the U.K. showing a strong preference for domestic stocks, despite representing a small slice of the global market.
Shares of familiar, home-grown companies create a sense of comfort for investors while eliminating currency-related risk, Hasanjee explains.
Canada's market is highly concentrated. The 10 most common holdings constitute 36.9 per cent of the index. These are mainly banks, railroads, Enbridge (ENB.TO)(ENB), and Shopify (SHOP.TO)(SHOP).
"The result is underweighting other important sectors such as information technology, healthcare, and consumer staples," Hasanjee said, noting real estate, while a significant portion of Canada's GDP, is not well represented on the Toronto Stock Exchange.
Last year, the S&P/TSX Composite Index (^GSPTSE) handily outperformed the S&P 500 (^GSPC) and Nasdaq (^IXIC). Some market observers see this being the case for years given Canada's exposure to energy and commodities, as well as other sectors less sensitive to higher interest rates.
However, Hasanjee sees the risks of Canadian home bias outweighing the rewards.
"There have been pockets of outperformance, but there has also been consummate higher risk, and also more volatility, in Canadian markets. That volatility comes without a proportionate increase in returns," he said. "Any portfolio that deviates from the global market is by definition inefficient."
Canadians, and stock investors in other developed economies, seem to be catching on. According to Vanguard's research, the average weight of domestic equities has declined from 67.1 per cent in 2002, to 37.7 per cent in 2022, across Australia, Canada, Japan, the Netherlands, Switzerland, the U.K., and the United States.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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