facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Home Country Bias - What Is It and Why Does It Matter? Thumbnail

Home Country Bias - What Is It and Why Does It Matter?

Home Country Bias - What is it and why is it harmful?

Canada represents about 2.4% of the total global market capitalization of equities in the world (according to statista.com)

        ○ In fixed income, Canada represents about 4% of the total global market

        ○ So, in the global scheme of things - Canada is fairly small slice of the pie

 Canada is also a very concentrated equity market when you look at the type of businesses that are the largest in Canada

        ○ We have a heavy over-weight to Energy and Financial Services companies, as well as materials when compared to global averages

 According to a white paper from Vanguard written in 2014, relative to the global average weightings by industry, we have:

  •   11.4% overweight to Materials
  •   23.1% overweight to Energy
  •   35.6% overweight to financials

 According to another white paper from Vanguard written in 2014, Canada has underweights to many sectors, including:

        ○ 11% underweighting to information technology

        ○ 6.8% underweighting to healthcare

        ○ 6.7% underweighting to consumer discretionary

        ○ 6.2% underweighting to consumer discretionary

Canada's equity market is also very concentrated at the top

        ○ According to a whitepaper by RBC Global Asset Management in 2019, 36.5% of Canada's equity market is represented by Canada's 10 largest equity names.

        ○ Compared to the MSCI Europe, which has 12.1% total weight of the top 10 holdings

        ○ Compared to the S&P 500, which has 21.7% total weight of the top 10 holdings

    - According to Vanguard, 56% of Canadian investors' equity exposure is in Canadian stocks


        ○ Portfolios I recommend will typically have about 30% exposure to Canadian equities, which is still an overweight to Canadian stocks, the rest allocated to the global market weight

        ○ We don’t know which countries are going to outperform, so the best thing is to allocate more closely to the global market cap weighting

Reasons why some overweight to Canada is a benefit

        ○ Taxes - Canadian dividends received preferred tax treatment compared to foreign dividends 

        ○ Behavior benefits - having an allocation to Canadian equities can help prevent regret and bad portfolio decisions if Canadian investments perform well (reduces fear of missing out)

        ○ Volatility Benefit - historically, a 30% weighting to Canadian equities has resulted in less volatility when compared with a market capitalization weighted portfolio.