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Dale Jackson

Personal Finance Columnist, Payback Time


Canadians haven’t been traveling abroad during the pandemic but their money sure has.
According to data released by Statistics Canada this week, Canadian investors acquired a record $57.2 billion in foreign securities during the spring months that constitute the second quarter of 2021.
The massive flow of investments were made by Canadian businesses, governments and big institutional investors, but also include individual retail investors either directly or through pensions, mutual funds and exchange-traded funds (ETFs). 
It’s a sharp increase from the $40 billion invested by Canadians in the first quarter as investors plowed their cash into equities and debt securities like bonds. 
StatsCan said the $20 billion invested in foreign debt securities was almost evenly split between corporate and government borrowers as Canadian investors scoured the globe for whatever meagre yields were being offered.
Not surprising, the bulk of the investments ($33.7 billion) went into U.S. equities in the second quarter, following another $91.3 billion invested over the previous year. Most of the investment activity, according to StatsCanada, targeted large technology companies such as Apple Inc., Microsoft Corp., Alphabet Inc. and Facebook Inc.
The new found wanderlust is a positive sign for Canadian investment portfolios notoriously tethered to a home bias. Investment savings tend to be heavily skewed toward Canadian publicly-traded equities despite the fact that they account for less than three per cent of global equities. Of that three per cent, roughly two-thirds are directly tied to the resource or financial sectors, which could be devastating to retirement savings if one of those sectors falters.
Global diversification can hedge that sort of risk and expose an investment portfolio to a wide variety of opportunities in sectors and geographic regions within the remaining 97 per cent of the global equity market.
At the same time, a relatively strong Canadian dollar is giving Canadian investors more buying power on international markets. With the loonie near 80 cents to the U.S. dollar, Canadians who beefed up U.S.-denominated accounts in their registered retirement savings plans (RRSP) and tax-free savings account (TFSA) to purchase foreign equities can expect them to hold their value if the loonie heads below 70 cents as it did at the onset of the pandemic.
Most Canadian trading accounts have easy access to buying U.S.-listed stocks directly, which can also provide exposure to the rest of the world since the U.S. dollar is the global standard. Roughly 50 per cent of all publicly-traded companies in the world are based in the United States and many operate at a global level. That not only gives investors in U.S. stocks a global reach, but it also puts the onus on the company to hedge all other foreign currencies.
Investing directly in markets outside of Canada and the U.S. can be difficult and expensive for the average investor when you take fees into account, but there are ways.
Most Canadian mutual fund providers offer unhedged U.S. dollar versions of foreign equity funds. You can invest in a broad global fund (all countries) or international fund (all countries minus Canada and the U.S.), or funds that concentrate on specific countries, regions, or global sectors like technology.
Many foreign equity funds are actively managed by investment teams with vast research capabilities and experience in the focus area. Some funds are sub-managed by firms located in the specific geographic region.    
Annual fees for that sort of reach and expertise can be as much as three per cent of the total amount invested, which is ultimately drawn from the total return.
ETFs generally have the same reach as mutual funds in terms of geographic regions and global sectors. The big difference is that they are passively managed. That means holdings are bought and sold according to a preset formula such as market weighting on the underlying index. However, ETFs are not as effective as mutual funds at adjusting to changes or nuances relating to specific foreign markets.
On the plus side, fees on unhedged foreign ETFs are usually much lower than mutual funds; often below 0.05 per cent of the amount invested annually.
While the vast majority of equities are listed outside Canada, the proper mix of Canadian and foreign equities in a typical Canadian investment portfolio depends on the individual investor. As a general rule, Canadians who will be spending most of their time and money in Canada should have a large portion of Canadian assets to lower risk from currency fluctuations. Canadians who spend a lot of time abroad should have a larger portion of their portfolios in U.S. dollar investments. 
It’s best to discuss your personal situation with a qualified advisor.