Canadian equities
Canadian equities, for the purpose of this article, are common shares that trade on the Toronto Stock Exchange. Other types of Canadian equities, such as real estate investment trusts (REITs) or preferred shares, are covered elsewhere.
Canadian equities represented 3% of world stock markets at the end of 2019.[1] Nevertheless, many Canadian investors invest much larger portions of their portfolios in the domestic stock market. Reasons for this home country bias include a preference for the familiar, avoiding too much exposure to foreign currencies, and for taxable accounts, the dividend tax credit.
Benchmarks
Canadian equities are typically benchmarked against the S&P/TSX Composite Index. An alternative is the FTSE Canada All Cap Index, used by a Vanguard Canada ETF. The two are very highly correlated, see Canadian indices for a comparison graph. Large capitalization stocks are tracked by the S&P/TSX 60 Index.
Diversification
The Canadian stock market is significantly less diversified than the US stock market (or the European market), and tends to be heavily focused in three sectors[2]: financials; energy; and materials. This lack of diversification can lead to some difficulties in indexing, as the so-called 'broad indexes' may, on occasion, be relatively concentrated. Possible strategies to overcome this problem include global diversification, i.e. investing in foreign equities as well as in the domestic stock market, or stock picking to mainting a better sector balance (see diversification strategies for more details).
Mutual funds and exchange-traded funds
Many index exchange-traded funds (ETFs) follow the S&P/TSX Composite Index, or rather its capped version. TSX-listed examples are the iShares Core S&P/TSX Capped Composite Index ETF (XIC) and the BMO S&P/TSX Capped Composite Index ETF (ZCN). Vanguard Canada offers the FTSE Canada All Cap Index ETF (VCN) which follows a different index as noted above.
Other ETFs covering Canadian equities have a narrower focus such as large caps (e.g., XIU or VCE). Note that as of September 2023, XIU still has a management fee of 0.15% (MER of 0.18%) at a time when XIC, ZCN, VCE and VCN all charge about 0.05% (MER 0.06%).
Countless actively managed mutual funds cover Canadian equities, but their asset-weighted management expense ratio are among the highest in the world[3]. Passively managed index funds and are also available and tend to have much lower fees. A notable one for self-managed investors is the TD Canadian Index Fund - e, Fund Code TDB900, with a 0.28% MER. For investors using an advisor and paying fees to them directly, the RBC Canadian Equity Index ETF Fund (RBF2142) is a F-series mutual fund which contains nearly 100% XIC, with a MER of 0.16%.
Stock picking
Some Canadians include individual stocks in their portfolios. Such stocks may be selected according to several different investment styles, depending upon the investor.
See also
References
- ^ Credit Suisse Global Investment Returns Yearbook 2019, viewed May 17, 2020.
- ^ MSCI Indices, Global Industry Classification Standard (GICS®) Structure - GICS - MSCI, viewed October 2, 2021.
- ^ Morningstar, Global Fund Investor Experience - 2019 Report, September 17, 2019, viewed October 2, 2021
External links
- Canadian Portfolio Manager blog, Understanding Canadian Equity ETFs, January 2019
- Understanding Canadian Equity ETFs, a video from Justin Bender