Canadian equities, for the purpose of this article, are common shares that trade on the Toronto Stock Exchange. Other types of Canadian equities, such as real estate investment trusts (REITs) or preferred shares, are covered elsewhere.
Canadian equities represent 3% of world stock markets at the end of 2013. Nevertheless, many Canadian investors invest much larger portions of their portfolios in the domestic stock market. Reasons for this home country bias include a preference for the familiar, avoiding too much exposure to foreign currencies, and for taxable accounts, the dividend tax credit. Between 1900 and 2011, Canadian equities provided a nominal compound return of 8.9% with a standard deviation of 17.2% (see Canadian asset class returns). Canadian equities are typically benchmarked against the S&P/TSX Composite Index.
The Canadian stock market is significantly less diversified than the US stock market (or the European market), and tends to be heavily focused in three sectors: financials; energy; and materials. This lack of diversification can lead to some difficulties in indexing, as the so-called 'broad indexes' may, on occasion, be relatively concentrated. Possible strategies to overcome this problem include global diversification, i.e. investing in foreign equities as well as in the domestic stock market, or stock picking to mainting a better sector balance (see diversification strategies for more details).
Mutual funds and exchange-traded funds
Countless actively managed mutual funds cover Canadian equities, but their asset-weighted management expense ratio are 2.25%, the highest in the world. Passively managed index funds and exchange-traded funds (ETFs) are also available. A notable index fund is the TD Canadian Index Fund - e, Fund Code TDB900, with a 0.33% MER.
Many ETFs similarly follow the S&P/TSX Composite Index, or rather its capped version. TSX-listed examples are the iShares Core S&P/TSX Capped Composite Index ETF (XIC) and the BMO S&P/TSX Capped Composite Index ETF (ZCN). Vanguard Canada offers the FTSE Canada All Cap Index ETF (VCN) which follows a different index but the latter is almost identical to the S&P/TSX Capped Composite.
Other ETFs covering Canadian equities have a narrower focus such as large caps (e.g., XIU or VCE). Note that as of December 2015, XIU still has a management fee of 0.15% (MER of 0.17%) at a time when XIC, ZCN, VCE and VCN all charge 0.05%.
Some Canadians include individual stocks in their portfolios. Such stocks may be selected according to several different investment styles, depending upon the investor.
- Credit Suisse Global Investment Returns Yearbook 2014, viewed January 1, 2015.
- MSCI Indices, Global Industry Classification Standard (GICS®) Structure - GICS - MSCI, retrieved November 28, 2012.
- Philips et al., The case for index-fund investing for Canadian investors, Vanguard Research, July 2014, viewed February 3, 2015
- Morningstar, Global Fund Investor Experience - 2013 Report, May 15, 2013, viewed January 14, 2015: "Among the 24 countries in this survey, Canada has the highest annual expense ratios for equity funds, the second highest for bond funds, and the highest for allocations funds"