Growing up in Niagara, in the shadow of General Isaac Brock’s Monument, I learned of the War of 1812 and of how our troops bravely repelled the Yankee aggressors. What I did not learn was that the war and its aftermath would scar Canadian investors’ portfolios two hundred years later.
Yet in the 21st century, we live in a first-world country with a third-world economy built on oil, minerals and trees and the banks needed to finance this activity. (If I’ve angered you then I may as well add that I’d rather have a hero like Terry Fox on our coins than any monarch.)
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?)
Here’s our economy, by sector, as seen through the 300-company iShares S&P/TSX Composite ETF (XIC/TSX): 25% Energy; 19% Mining; 32% Financials; 24% everything else. Among our smaller companies, the skew is worse: 96% of the iShares S&P/TSX Venture ETF (XVX/TSX) is in either energy or minerals.
Here’s the U.S. economy seen through the iShares S&P 500 ETF (IVV/NY): 10.6% Energy; 3.4% Mining; 14.4% Financials; 22.3% Consumer Goods & Services; 19.7% Info Tech; 12.1% Health Care. You see my point: those aggressive Yankees sure 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 plunged recently on declining commodity demand from Asia and Europe. Total return from the start of 2011 to current on the TSX Composite ETF is minus 11.6%; and a numbing minus 48.9% on the S&P/TSX Venture Index. 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. In the TSX Composite, it would yield $18,000.
That extra $6,800 shrinks next to the S&P’s gain over 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 to invest in. Our portfolios risk over-exposure to a few large firms. RIM, Sino-Forest, Nortel before that are examples of this risk made real. Sometimes clients diversify across Canadian equity mutual fund 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? Canadian investors need to invade other markets, including the United States but also many others. Fortunately, the cost of investing abroad has fallen dramatically since Sir Isaac’s time due almost entirely to the rise of exchange-traded funds.
A typical ETF investing in a broad index like 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 that $90 fee and advocate buying the individual stocks. But factor in the broker commissions and the ETF’s fee is still cheaper. Then, the ETF gives you the power to adjust your position easily, 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. However, 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.