Personal Investor: Hedge NAFTA risk by investing abroad
Most Canadians can only hope for the best as North American Free Trade Agreement talks enter a crucial phase. The outcome could have a profound will impact on the way we live and work, but it doesn’t have to have a big impact on the way we invest for retirement if our portfolios are properly diversified.
Canadians tend to over-invest in Canada. Many surveys peg the portion of Canadian holdings at well over half of the typical portfolio. The fact is, less than three per cent of publicly-traded global equities are Canadian. Within Canada about one-third are directly tied to the resource sector and another third are financial companies.
If you plan to take advantage of the $5,500 2018 contribution limit on your tax free savings account (TFSA) or make a contribution to your registered retirement savings plan (RRSP) before the March 1 deadline, and you want to expand your portfolio beyond Canada, here are a few ways to do it.
- U.S. stocks: Most Canadians have direct access to U.S. listed stocks. Compared with Canada, the United States is a very diversified market. It is also home to many multi-national corporations that generate revenue from high growth areas in every corner of the globe.
- International mutual funds: International funds generally invest outside Canada and the U.S. The average international mutual fund has returned 10.5 per cent annually over the past five years. That level of global reach has its price in the form of annual management expense ratios (MER) of about three per cent. Country and region specific funds are also available for investors who want to target their investment objectives more closely.
- International ETFs: International mutual funds track the MSCI Europe, Asia, Far East Index. The total return for the MSCI EAFE Index in Canadian dollars has averaged 13.5 per cent annually over the past five years. Those higher returns are no doubt linked to the fact that the fees are much lower than mutual funds – usually less than 0.03 per cent annually.
U.S. dollar trading accounts: One of the biggest risks in NAFTA negotiations is how the Canadian dollar will be affected. That could have a big impact on Canadians who want to spend more time in the U.S. or abroad. One way to hedge the loonie is to trade in U.S. dollars in a U.S. dollar trading account. Many Canadians are surprised to learn they can open up U.S. dollar accounts in their TFSAs and RRSPs.
Diversifying globally is not something you should do overnight. If you feel Canada is overexposed in your portfolio talk to an investment advisor about a plan to make it… a little less Canadian.