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As great as it is to travel in Canada, Canadian travelers know when they visit other countries they’ll enjoy an even wider range of experiences.

The same holds true for Canadian investors. Canada represents only 3% of capital markets in the world.1 The other 97% of investment opportunities lie in other regions. This means more opportunities to diversify, which ultimately leads to a smoother investment experience. Because when one region is performing poorly, another could be enjoying stronger performance.

The chart below shows that investing too narrowly in any single country like Canada can lead to a bumpier ride when compared to a geographically diversified portfolio. This principle is known as “concentration risk.” And if, like many investors, you don’t stay the course, it could limit your returns or lead to lower returns.

Performance of equity markets by country over the last four decades

2020s 2010s 2000s 1990s 1980s
Korea 45.2 New Zealand 12.1 Brazil 14.7 Sweden 18.9 Sweden 29.7
China 43.5 USA 11.2 Australia 10.7 Switzerland 17.4 Japan 28.7
Taiwan 42.0 Switzerland 9.3 Norway 10.2 Brazil 17.1 Italy 22.9
Sweden 24.4 Taiwan 9.2 Korea 8.9 USA 16.1 Spain 21.3
New Zealand 20.2 Sweden 7.8 Canada 8.2 United Kingdom 14.2 United Kingdom 19.3
USA 19.2 Japan 6.9 New Zealand 6.8 Spain 14.2 Equal weight portfolio 18.2
Japan 14.9 France 6.1 Switzerland 4.9 France 13.5 France 17.6
Switzerland 12.8 Equal weight portfolio 6.0 Equal weight portfolio 4.2 Germany 12.9 Germany 16.7
Germany 12.3 Germany 6.0 Spain 3.9 Equal weight portfolio 10.0 Australia 13.9
Equal weight portfolio 9.7 Korea 5.6 Sweden 3.2 Canada 9.8 Norway 12.9
Australia 8.9 Australia 5.2 United Kingdom 1.6 Australia 8.6 Switzerland 12.3
Canada 6.2 United Kingdom 5.1 Germany 0.7 Italy 8.4 USA 12.1
Italy 2.4 Canada 4.3 France 0.4 New Zealand 5.0 Canada 11.7
Norway -0.9 Norway 3.3 USA -1.5 Taiwan -0.3
Spain -4.5 China A 2.4 Italy -1.6 Japan -0.7
United Kingdom -10.4 Italy 0.8 Japan -3.0 Korea -0.6
Brazil -18.9 Spain -0.5
Brazil -0.6

Source: Morningstar, RBC GAM, as of December 31, 2020. For illustrative purposes only. All performance in USD. An investment cannot be made directly into an index. The above does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results. Country performance represented by index Australia = MSCI Australia Index, Brazil = MSCI Brazil Index, Canada = MSCI Canada, China = MSCI China A Index, France = MSCI France Index, Germany = MSCI Germany Index, Italy = MSCI Italy Index, Japan = MSCI Japan Index, South Korea = MSCI Korea Index, New Zealand = MSCI New Zealand Index, Norway = MSCI Norway Index, Spain = MSCI Spain Index, Sweden = MSCI Sweden Index, Switzerland = MSCI Switzerland Index, Taiwan = MSCI Taiwan Index, United Kingdom = MSCI United Kingdom Index, United States = MSCI US Broad Market Index, Equal Weight Portfolio = equally weighted average of all countries represented

Investors may not realize how closely tied the performance of the Canadian market is to a limited number of companies. In Canada, the 10 largest companies in the S&P/TSX Composite Index account for more than a third of the total Index. That’s significantly more than the 10 largest holdings in most other major indexes around the world.

Total weight of top 10 holdings within their respective index (%)

Total weight of top 10 holdings within their respective index (%)

Source: RBC GAM, Bloomberg. Data as of January 31, 2019

Relative to global equity markets, Canada is highly concentrated in three sectors: Energy, Financials and Materials. These three sectors collectively account for almost two-thirds of the value of the Canadian stock market. At the same time, Canada is significantly underweight in Information Technology and Health Care. These two sectors have been driving forces behind global earnings growth in recent years.

Note: As of May 31, 2019. Sources: MSCI Index - https://web.tmxmoney.com/indices.php?section=tsx&index=^TSX#indexInfo TSX Index – https://us.spindices.com/indices/equity/sp-tsx-composite-index

When you invest globally, you can more easily diversify by sector as your portfolio gains exposure to industries underrepresented in Canada. Some of these sectors are important sources of returns. Others offer defensive characteristics during cyclical downturns.

When diversifying your portfolio globally, it’s important to look beyond your equity holdings. Investing mainly in Canadian bonds or other fixed income securities can also pose some concentration risk. Whether markets are up or down, diversifying your fixed income holdings across issuers (i.e. government, corporate), credit quality (i.e. investment-grade, high yield) and countries can have many benefits. These include:

  • reduce your portfolio’s sensitivity to interest-rate changes
  • achieve a higher return potential
  • add a potential income boost

Global bonds have generally been less volatile 

Concentration risk also exists in the bond market. While it may seem counter-intuitive, a portfolio of global bonds has historically been less volatile than a portfolio of Canadian bonds.

Source: RBC GAM, Morningstar, annual standard deviation from Jan 1, 1999 to Dec 31, 2018 Canadian Government bonds: FTSE Canada All Government Bond, World Government Bonds (Hedged): FTSE World Government Bond Index Hdg ($CAD)

So while Canada is a great place to invest – and home to many great companies – it can pay to think globally. You’ll not only avoid the pitfalls of concentration risk, you’ll also enjoy the benefits of travelling as an investor to parts of the world where there is even more opportunity than you’ll find at home.

1. Source: Bloomberg, as of June 19, 2019 Percent of world market capitalization of listed domestic companies.


This has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when provided. Information obtained from third parties is believed to be reliable but RBC GAM and its affiliates assume no responsibility for any errors or omissions or for any loss or damage suffered. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.