Canadian investors often have trouble finding diversification within their own domestic borders, given the overweight nature of the TSX to energy and mining. While I believe energy and mining may outperform in the medium-run due to changing macroeconomic fundamentals (this is beside the point), diversifying a portfolio to include securities from outside Canada is one of the best ways to generate sustained long-term return with reduced systematic risk.
While one can never diversify away global systematic risk, it is true that owning securities based in different companies can offer an investor with an advantage over an underdiversified investor, in that simply holding one’s eggs in more geographic baskets reduces long-term risk factors over a long period of time.
One market most Canadians look to first to diversify away some of the domestic risk (housing market bubble, continued oil slump) is the U.S. market. An ETF which does a good job of encompassing much of what most Canadian investors will look for in the U.S. market is Vanguard U.S.
Total Market Index ETF (CAD Hedged) (TSX:VUS). This ETF holds many of the largest an most prominent U.S. securities while offering Canadian investors the safety and security of being hedged to the Canadian dollar.
While some investors may want to choose unhedged ETF options to gain exposure to the U.S. dollar (and there are a number of great options out there), this ETF minimizes currency risk while allowing for maximum diversification across these two indices.
I would recommend investors consider this ETF as a starting point, looking to other global markets to maximize diversification for a properly constructed long-term portfolio.
Invest wisely, my friends.
