The New York Stock Exchange is seen through a window guard on April 16 in New York.Peter Morgan/The Associated Press
When I began my career in the 1980s, the Canadian investing scene was quite insular. Portfolio managers were restricted to holding a maximum of 10 per cent of total assets outside Canada. Investment professionals did not bother with the rest of the world except for watching the S&P 500 index since it led the TSX. It did not seem to concern market participants that they were restricted.
Canada at the time had a strong economy with a standard of living of around 90 per cent to 95 per cent of that of our American cousins, depending how you looked at it. In fact, Ontario was effectively equal to the U.S., as it was strong in manufacturing. Canada had a comparative standard of living without the high crime rates of America, with free (or, at least, taxpayer-funded) health care and an abundance of oil and gas.
Analysis was primitive then. Few had easy access to comparative return figures between global markets, nor did they care, because they were so constrained in their choice of investments. The diversification argument was barely understood and the concept of using correlation analysis to reduce volatility was just something a couple of young nerds like me cared about.
Fast-forward to 2024. The standard of living of Canadians is anywhere from 25 per cent to 40 per cent below that of Americans, based on my calculations that looked at a variety of data that include prices and purchasing power parities, GDP per capita, average incomes, taxes, and costs of living. Taxes always seemed higher in Canada and people complained, but not as obsessively as today. In retrospect, we were whiners back in the early 1980s, without ever realizing how good we had it.
Analyzing relative tax revenue is surprisingly difficult because there are so many moving parts – different types of taxes, rebates, tax credits, accounting conventions, exchange rates, and other complexities. However, from my calculations, the average Ontarian will pay somewhere between 40 per cent and 50 per cent of their lifetime earnings to the government. The average American will pay about 35 per cent, although it ranges widely based on state of residence.
The average American pays slightly more in total taxes than the average Canadian but, based on median incomes, earns significantly more. This leaves Canadians overall with only between 50 per cent to 60 per cent of the after-tax income of Americans. Deduct the higher costs for housing, food and gasoline in Canada, and the picture gets very depressing.
Canada’s recent federal budget contained $20-billion in tax increases over the next five years. Capital-gains taxes are going up, which is an anti-investment policy. This reality leads us to ask the question: Why would a rational person invest in Canada if they did not have to? Canada is about as welcoming to investment capital as a fox is in a hen house. Canada only makes up 2 per cent of world gross domestic product, compared with the U.S. at 26 per cent. Frankly, we’re small potatoes. In fact, being significantly overweight in Canadian investments lessens diversification. Much of our stock market is concentrated in banks and resources.
Lacklustre GDP per capita growth in Canada over the past several years and the anti-investment bias that seems to be endemic in this country has coincided with poor long-term equity returns relative to the U.S. For the 10 years ended March 31, 2024, the total return of the S&P/TSX was an annualized 8.13 per cent, compared with the S&P 500 at 14.64 per cent, in Canadian dollars. This is significant as $100,000 invested in the Canadian market would be worth $218,505. The same amount invested in the U.S. would grow to $392,068, or almost 80 per cent more.
Fortunately, investing beyond our border is easy to accomplish with low-cost exchange-traded funds. Non-registered accounts may not receive the benefit of the dividend tax credit in some cases, but the upside potential could still be worth it.
There is an enormous number of foreign ETFs investors can choose from. There is the SPDR S&P 500 ETF Trust SPY-A, which is a staple, and a number of similar currency-hedged versions if one prefers.
Some offshore equity exposure in advisable – the U.S. may not always be an outperformer. The JPM International Research Enhanced Equity ETF JIRE-A is a diversified portfolio of companies domiciled outside of the U.S., and although an ETF, it is actively managed in a conservative manner.
Given the global geopolitical situation and the rise in military spending, it would be prudent to hold some defence stocks. The iShares Aerospace & Defense ETF ITA-A gives the investor diversified exposure. It has gained almost 25 per cent since the Oct. 7 attacks against Israel.
Bonds should also be in any diversified portfolio. The iShares Global Government Bond Index XGGB-NE ETF, which is hedged back into Canadian dollars, is one that I like. It has a U.S. Treasury weighting of about 40 per cent. The rest of its bond exposure is spread out across the globe, with less than a 2-per-cent weighting to Canada. Government bonds are better insurance against severe bear markets than corporate bonds – and I feel stock markets are due soon for a significant pullback. I also think the extra yield corporate bonds offer right now relative to their risks are rather thin.
The poet Maya Angelou once said: “When someone shows you who they are, believe them the first time.” For me, it’s easy to see that the current government of Canada sees its role as a wealth distributor and not a wealth facilitator. Income redistribution is favoured over investment and productivity even if it results in more income decline. Many of their policies are signalling that Canada is not a good place to invest.
This is likely to continue for years, as even with a change in government, it will take a long time to reform tax and regulatory legislation and alter the maladaptive policies instituted over decades. It might take a generation to restore Canada’s reputation as a good place to invest.
In the meantime, Canadian investors should maximize their foreign exposure and consider having minimal exposure to Canada – or none at all.
Tom Czitron is a former portfolio manager with more than four decades of investment experience, particularly in fixed income and asset mix strategy. He is a former lead manager of Royal Bank of Canada’s main bond fund.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.