Diversification and Global Opportunities
Jarrett McKay - Feb 16, 2016
While many investment opportunities exist within Canadian markets, here are some reasons why looking beyond domestic borders provides diversification opportunities.
The Canadian market is relatively small. The Canadian equity market represents only 3.3 percent of global equity markets and is ranked 6th largest in the world, which shows how fragmented markets are internationally.*
The Canadian market is concentrated by industry. Around 65 percent of the S&P/TSX Composite Index is represented by just three sectors: financials, energy and materials.* With recent challenges in the energy sector and sluggish commodities markets, looking beyond domestic borders may provide diversification opportunities.
The performance of different markets will vary. Many factors influence the movement of each market, including local monetary and fiscal policies, economic growth potential and more. Foreign markets may perform differently than Canadian markets, which may help to dampen volatility or lower risk across a portfolio.
Global Diversification: A Consideration
It is rare to find any single market that has been a consistent top performer. North American performance has not dominated internationally over the past decade. As it is never possible to predict which market will be a top performer in any given year, diversification across markets may be one consideration.
There are many other considerations when looking beyond domestic markets, including: How high should your foreign content be? Is there an associated currency risk? Are there tax implications? These are some of the many things that we consider when we determine the global exposure of your portfolio and tailor it to meet your individual needs.
Ways to Diversify
Increasing the amount of foreign content in your portfolio doesn't necessarily mean that you need to make direct investments on a variety of international exchanges.
One of the easiest ways to gain diversified foreign exposure is through the use of global funds, such as global mutual funds or exchange-traded funds (ETFs). Many Canadian mutual fund companies offer funds that invest outside of Canada. There has also been a proliferation of lower-cost ETFs available both on Canadian and U.S. markets that offer diversified exposure to stock exchanges throughout the world.
Investing directly in foreign corporations on international exchanges may be somewhat cumbersome. Instead, investors may consider U.S. exchanges that list U.S. multinational corporations operating in different geographies as a way to gain international exposure. Some non-North American companies have their shares held on deposit as American Depositary Receipts (ADRs) in the U.S. and trade on U.S. exchanges in U.S. dollars.
Sources: *World Federation of Exchanges, at 12/31/14 by USD market capitalization.**tmxmoney.com, S&P/TSX Composite Index by sector, at August 31, 2015.
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