Canada-the country that fell off the investment radar screen. Really it did. Somewhere over the last few years, the Canada that I knew has disappeared under the so-called leadership of our remarkable Prime Minister-Justin Trudeau. I am not here to discuss politics, that would be pointless. But as someone who lives in Canada, I need to maintain a source of Canadian dollars. At least that’s what I believed.
My portfolio has been balanced between the United States and Canada for the longest time. My thought process was that I should not take on board the currency risk for my entire portfolio. That currency risk is between US and Canadian dollars.
Unfortunately, I have suffered a significant penalty because of that decision. Let me explain why and how I should evaluate the situation on an ongoing basis in the future. I’ll add that reducing the Canadian dollar proportion of my portfolio is not easy. But it’s more psychological than a financial barrier.
The Canadian Stock Market or the Absence Thereof
The Canadian stock market is basically the land of the lost. As you can see, the TSX ETF here has shown relatively modest gains over the last five years. 30 percent more or less sounds like a reasonable rate of return, but when you drill down into the market and look for individual investments, it’s a whole other story. The returns mirror that of the Dow, but only during that shortened time frame. When you take it to the maximum on Google Finance, you see a completely different story. Dismal long-term returns compared to the US indices. (Not foreign exchange adjusted). If you are investing in the index, Canadian stocks are dead money.
The portion of my portfolio allocated to Canada has significantly underperformed that of the US portion. By a wide margin. Investments in companies like Microsoft, Mastercard or Amazon are not available in the Canadian market. Any remaining companies that have anything to do with manufacturing or processing are pretty much non-existent.
It’s overpopulated with financial services companies and real estate investment trusts such as CapReit. You will see here that the performance of this real estate investment trust has been less than stellar. The yield on the stock has been pretty underwhelming. Frustrating.
Much of this is attributable to the never-ending attacks of environmentalists on the Canadian resource sector. Canada has abandoned these traditional sources of economic growth. Mine is not to reason why. So the Canadian economy has become a “one-trick pony”. Real estate. That’s the only investment that most Canadians can look to unless they look outside the country.
Foreign Exchange Risks
One of the reasons that the so-called professional investment advisors caution local investors about the US market is the matter of foreign exchange risk. That foreign exchange risk is an adverse change in the value of the US Dollar versus the Canadian Dollar. Looking at the long-term chart, it would seem to be a pretty risky business.
However, during the last ten years or so the exchange rate has been pretty much range bound. And given the outsized performance of the Dow compared to the TSX it would seem to have been worth the risk. Hence the approximately 50/50 split of my portfolio has become an anchor on my overall portfolio performance. An alternative is to invest in a fully hedged index ETF to minimize the risk. When you look at the performance of the Dow versus the hedged investment, something is going on here. The DIA returns are on a US dollar ETF, so it’s difficult to compare the performance back to Canadian dollars. This requires some further investigation.
It would make sense to revisit this to see what the cost/benefit is of a hedged product. But the bottom line is that investing in Canada unless you are lucky, is a losing proposition. It’s best to find a way to look south over the long term.