There’s been an unprecedented wave of Canadian pride, including buying Canadian-made products in favour of ones produced in America. Using our wallets seems like a natural response to push back on the threat of U.S.-imposed tariffs.
As a country, we’re collectively checking for the ‘Made in Canada’ label while grocery shopping, but it seems like the buck stops at consumer spending without much discussion about exercising our investment capital in a similar fashion.
Despite the country’s rise in nationalist loyalty, there hasn’t been a push to invest more in Canadian companies and markets, while avoiding allocating capital to the U.S. economy. Why?
The U.S. economy is big. The GDP of the U.S. is approximately $30 trillion, while Canada’s is around $2 trillion. The difference in the size of the stock market of the two countries is also substantial. The aggregate market cap of the S&P 500, the most common benchmark for large-cap equities in the U.S., is approximately $53 billion. In comparison, the market cap of the S&P/TSX Composite, the leading benchmark for large-cap equities in Canada, is just over $4 billion.
Over the past decade or so, Canadian investors have shied away from Canadian assets and increased portfolio exposure to international holdings. According to a report by Vanguard, the collective allocation to Canadian assets has decreased from 67 per cent of total portfolios in 2012 to 50 per cent in 2023.
Most Canadian investors have significant exposure to U.S. equities in their portfolios. Ten years ago, 49.5 per cent of international assets held by Canadians were domiciled in the U.S. That figure rose to 59 per cent by the end of the third quarter of 2024.
It’s not all that difficult to understand the trend. From a financial return perspective, at the end of 2024, the 10-year annualized return for the American S&P 500 was 10.8 per cent. It was 5.2 per cent for Canada’s TSX Composite Index and 4.8 per cent for MSCI World ex USA (a global markets benchmark, excluding U.S. holdings).
Couple strong relative performance by the U.S. market with the strength of the American dollar, and it’s clear investing in the U.S. has benefited Canadian portfolios.
And yet, for many of us, investing with such a heavy allocation to the American market doesn’t feel right anymore. The top five largest companies in the world are American. The three wealthiest people in the world — Elon Musk, Mark Zuckerberg and Jeff Bezos — are American too. Padding their pockets doesn’t feel right either.
Is it possible to replace U.S. equities in a portfolio in a financially responsible manner?
It would be difficult in good conscience to preach fully divesting from American companies, but investors can seize this opportunity to trim their allocations to the U.S. market and further diversify their holdings by investing in their local economies.
It may take more research to find the right opportunities, but it’s well worth it for investors looking to act with their wallets. Financial instruments like community bonds — debt issued by not-for-profits or charities to both retail and accredited investors — tend to have meaningful impact within local communities while also making interest payments to bondholders.
For investors interested in financing projects like local affordable housing developments, community bonds could make a lot of sense for a portfolio. Tapestry Community Capital is a good resource to learn more about the community bond structure as well as individual projects.
If equity diversification is the goal, allocating capital to place-based funds could be appealing. These types of funds invest in ventures within a certain region, so investors can be confident their capital is being allocated to specific communities.
These diversified financial instruments typically project decent financial returns. The SVX (social venture exchange) is a helpful resource in discovering more about place-based funds, including opportunities to invest.
Investors can also consider moving their deposits and cash management to credit unions. Unlike banks, credit unions tend to leverage deposits by lending capital to local businesses exclusively. Just another way to have more of a local tilt with our money.
Collectively trimming our U.S. equities portfolio allocation may not move the needle enough to bring about a change in American-imposed tariff policy, but reallocating the redemptions to local economies would make a meaningful difference to our country.
Let’s invest more in us, not the U.S.
Photo courtesy of DepositPhotos
