A tale of two countries, two economic styles
Growing up in Niagara, in the shadow of General Isaac Brock’s Monument, I learned about the War of 1812 and how our troops bravely repelled the Yankee aggressors. What I didn’t learn was that the war and its aftermath would scar Canadian investors’ portfolios 200 years later.
In reaction to the war, our British colonial government rejected all things American — including public education, democracy and, to the detriment of our portfolios, industrial capitalism and entrepreneurial innovation. Instead, the colonial administrators fawned on farmers, furriers, miners and, much later, oilmen. To this day, our government fights in European courts on behalf of a $20-million seal meat industry. Bizarre. Perhaps it means to keep sealers in perpetual dependent poverty?
The result is the Canadian economy has evolved much differently from that of our neighbours.
The Canadian economy, by sector, as seen through the 300-company iShares S&P/ TSX Composite ETF (XIC/
TSX), consists of: 25% energy, 19% mining, 32% financials, 24% everything else. The skew is worse among smaller companies: 96% of the iShares S&P/TSX Venture ETF
(XVX/TSX) is in either energy or minerals.
The U.S. economy, as seen through the iShares S&P
500 ETF (IVV/NY), looks like this: 10.6% energy, 3.4% mining, 14.4% financials, 22.3% consumer goods and services, 19.7% information technology, VIKASH JAIN
ETF Insight
12.1% health care and 17.5% everything else.
The point is that those aggressive Yankees have built a diverse economy that is innovative, modern and, over the long term, produces more sustainable wealth than mere rocks and oil.
Canadian equities have recently plunged on declining commodity demand from Asia and Europe. The total return from the start of 2011 of the TSX composite ETF is minus 11.6%, while the S&P/TSX Venture Index has dropped a numbing 48.9%. The S&P 500 ETF has climbed 9.1% in the same period.
True, in recent years, as oil and industrial metal prices climbed, the TSX composite outperformed the S&P 500. Investing $10,000 at the start of 2000 in the S&P 500 would yield $11,200 today. That same $10,000 would yield $18,000 on the TSX composite.
But the extra $6,800 pales in comparison to the S&P’s gain during the prior decade when U.S. companies began leveraging the power of the still-nascent Internet. The S&P 500 turned $10,000 invested at the start of the 1990s into $53,300 by the end of decade. The TSX turned it into $27,270.
Canadian markets also lack a breadth of companies in which to invest. Our portfolios risk being overexposed to a few large firms. Research In
Motion Ltd. (RIM/TSX), SinoForest Corp. (TRE/TSX) and Nortel Networks Corp. are some recent examples of this risk made real.
Sometimes clients diversify across Canadian equity
mutual funds offered by various managers. But look inside the funds and each holds the same usual suspects.
So what’s the remedy? How do we bury Sir Isaac’s ghost? One solution is that Canadian investors need to invade other markets, including the United States but also many others. Fortunately, the cost of investing abroad has dramatically fallen since Sir Isaac’s time due almost entirely to the rise of exchange-traded funds.
A typical ETF investing in a broad index such as the S&P 500 costs as little as $90 a year on a $100,000 investment. Compare that to the $2,500 charged by a typical mutual fund. Some object to even a $90 fee and advocate buying the individual stocks. But factor in the broker commissions and the ETF’s fee is still cheaper.
The ETF also gives investors the power to easily adjust their positions and the ability to buy foreign stocks without foreign currency risk and
nearly eliminates company specific risk.
Some investors use ETFs only for their foreign allocations. But with thousands of ETFs to choose from, more investors, including archerETF clients, are opting to build the bulk of their portfolio with ETFs: Canadian and foreign stocks and even bonds of various issuers and maturities.
What these world-wise investors understand is that though we cannot change our history, we can certainly control our future. And, ideally, this Canada Day weekend, that will include some Laura Secord ice cream.