If there’s one thing Canadians love, it’s Canadian stocks. For many years now, domestic investors have had a much higher allocation to this country’s companies than advisors usually recommend. While asset mixes will vary depending on the individual, having too much money in one country can hurt a portfolio, especially in Canada where financials, energy and materials account for two-thirds of our market.

While being too heavily weighted towards Canadian stocks means you’re likely not taking advantage of opportunities in other countries, it also means you may be missing out on some exciting industries that aren’t as developed here as elsewhere. One sector is particularly intriguing: healthcare, which includes pharmaceutical operations, biotech firms, medical device companies, hospitals, health insurers and more. 

Globally, healthcare stocks account for nearly 12% of the MSCI All Country World Index – it’s one of the largest sectors in the index – while making up a mere 1% of the S&P/TSX Composite Index in Canada. The domestic healthcare sector is also highly concentrated in cannabis stocks and small-cap biotech firms, both of which can be highly volatile. “These are not always the most suitable stocks for investor portfolios.” says Tarik Aeta, a portfolio manager and vice-president with TD Asset Management Inc. (TDAM).

Look outside of Canada, though, and “the world’s your oyster,” explains Trevor Cummings, vice-president of ETF distribution at TDAM. Many of the brand-name pharmaceutical companies, for instance, are based in either the U.S. or Europe, while innovative biotech firms are scattered around the world. You also should look farther afield to find publicly listed hospitals, diagnostic clinics and life science businesses, among other operations.

One reason why Canada’s medical sector is small compared to, say, the U.S., where the S&P 500 Index has a 13% allocation to healthcare companies, is because of our government-funded system. There are just fewer entrepreneurs and executives thinking about building a business in this space, and it’s harder for companies to make money in the Canadian market. “Obviously, you don’t have publicly traded hospitals here. It’s not a thing,” Aeta says. “But look at the U.S. and almost a quarter of the healthcare sector is services – that’s a quarter of the sector that wouldn’t exist here.”

Look abroad for opportunities

Given our home bias, which is partly a result of a rule, abolished in 2005, which only allowed 30% of an RRSP to be in foreign equities, and the lack of healthcare options on the TSX, most Canadians are underweight in what’s now potentially one of the more intriguing long-term opportunities on the market, says Aeta.

He’s bullish on the sector, largely because an aging population will need better services and treatments, but there’s also an almost insatiable demand for more innovations, such as new drugs, medical devices, and diagnostic tools. “Innovation will likely continue for years,” he notes. “Whether it’s cancer, Alzheimer’s or genomics – there are still many unmet needs.”

If Canadians sit on the sidelines, they’ll miss out on the many opportunities that exist today – and the many more that may come in the future. They’ll also miss out on the benefits of diversification.

Those who are too concentrated in one country, such as Canada, or in a couple of sectors, like financials and energy, could see their portfolio drop significantly when one of these areas struggles, while at the same time, not getting the growth that other sectors, like healthcare or technology, can provide.

Over the last 10 years, for instance, the S&P/TSX Composite Index is up approximately 85%, while the far more diversified S&P 500 has climbed by 387%, according to S&P Capital IQ. Canada’s market has struggled in part because we don’t have nearly as much exposure to America’s two biggest sectors – technology and healthcare – while our own energy industry has fallen by approximately 41% over the last decade. “In virtually all cases it pays to diversify,” says Cummings. “So you want to offset the exposures you might find at home with equities across the border or around the world.”

Get global diversification with ETFs

For the Canadians who do want to buy into healthcare, choosing individual names to add to a portfolio can be challenging. Not only are most people not familiar with most of the companies in this space, but there’s a vast array of operations all with different growth profiles and risks.

These days, more people are diversifying globally – both generally and within healthcare – through exchange-traded funds (ETFs). Many advisors like using ETFs for an industry such as healthcare, because it gives clients easy access to a growing part of the equity market and with less risk than buying specific names, explains Aeta.

Yet, many of the ETFs out there aren’t  well diversified globally. A number are too focused on the U.S. and in niche markets such as biotech, says Aeta. That’s why TDAM created the TD Global Healthcare Leaders Index ETF (TDOC), which launched in April. Currently, it holds 155 companies around the world, including in the U.S., Japan, Europe and other parts of Asia.

As well, it has a 2% weighting limit on any one individual name so that mega cap pharmaceutical companies don’t end up accounting for the majority of the assets in the fund. TDAM also wanted to give more meaningful allocations to large cap and even mid-cap securities. “A lot of what we do in the ETF space is we start by looking at the landscape as it exists,” Aeta explains. “And then we ask ourselves, can we add some value here by taking one of our own investment processes, or by designing a different sort of methodology to add value to the marketplace?”

It’s this kind of global approach to healthcare that could benefit Canadian investors who seek to diversify their portfolio. “It's a great opportunity to address a gap in portfolio construction,” Cummings says about TDOC. “But it's also another opportunity to say, you know what? Maybe, hypothetically, this transaction, this idea, this investment has legs, and I actually want to overweight healthcare. Something that, again, very few Canadians are doing right now.”

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