Why investors should embrace Canada
(MoneyWatch) The case for Canada as a place investors should look at was one of the most fascinating presentations at a recent Financial Planning Association (FPA) conference. The presentation by Dundee Wealth US showed the country's importance in our global economy. Here's my takeaway from that presentation and my recommendations on how to invest in our northern neighbor.
I once heard Canada described by a Canadian comedian as the "designated driver for North America," always trailing after its more flamboyant neighbor to the south "jingling the car keys." A humorous self assessment to be sure, but while Canada is not one to toot its own horn it remains an important economy, as these statistics illustrate:
- World's 8th-largest stock market by value
- 15th-largest economy by GDP
- 34.3 million population
- 2nd-largest land area
Canada also isn't burdened by the fiscal crisis the U.S. is grappling with. Its debt is about 36 percent of GDP, or roughly half that of the U.S. That may be why the Canadian dollar has been so strong against the greenback.
But the most compelling reason to invest in Canada is how different its economy is from both the U.S. and the rest of the world. Energy and basic materials constitute about 45 percent of the value of its stocks, compared to only about 15 percent for the U.S. and 19 percent for the world. To avoid Canada as a locale for investment is to significantly underweight these two key sectors.
How to invest in Canada
It wasn't always easy to invest in Canada using low-cost index funds. The first two generations of index funds were known as EAFE (Europe, Australia, and Far East) funds. This index of developed countries left out Canada and emerging markets. Second-generation funds, such as Vanguard's total international index funds, picked up emerging markets. But the index it followed, the MSCI index, picked up emerging markets yet again left out Canada. That was thankfully remedied roughly a year ago when Vanguard changed the index of that fund to include Canada.
Canada plays a critical role in world markets and needs to be in every equity portfolio. It makes up 8.5 percent of the value of non-U.S. stocks, so make sure your international fund includes Canada. I like the Vanguard Total International Index Fund (VXUS), which has a 0.18 percent expense ratio. If your 401(k) plan only has international index funds with EAFE and emerging market countries, consider buying a Canada-specific fund outside of your 401(k). iShares Canada (EWC) gives you exposure at a 0.52 percent expense ratio.
Canada is more than our good neighbor. It's a large part of the global stock market and a critical piece of your portfolio.
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