The Dangers of Owning a TSX Composite ETF

Many pundits have the same advice for Canadian investors. They should put their portfolio into a basket of ETFs.

That’s the easy part. The hard part is figuring out how much of a portfolio should be allocated where. Investors don’t just have to worry about owning stocks or bonds. They also have to worry about domestic versus international exposure.

Just about every Canadian investor has at least some exposure to our domestic stock market. Some even have much of their assets here at home, justifying it to themselves by saying a strong U.S. dollar is reason enough to avoid that nation’s stock market.

Besides, many just don’t want to take currency risks. They experienced that first hand when the Canadian dollar appreciated versus its U.S. counterpart.

But there are risks to keeping investment dollars at home. The TSX Composite is dominated by three sectors -- energy, metals and mining, and financials. The iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC) has 34.9% of its assets in financial stocks, 21.4% in energy stocks, and 12% in materials. Combined, that’s more than 68% of assets in just three sectors.

Other sectors are greatly underrepresented in Canada. Health care only makes up 0.61% of the main index’s assets, while information technology is also quite small with just a 3% weighting. In comparison, Apple Inc. (NASDAQ: AAPL) alone is 3.2% of assets in the S&P 500.

If investors are looking to own an index ETF, perhaps the S&P 500 and its much more diverse holdings would be the better choice.