It’s time for tax-burdened Canadians to look beyond domestic stocks and bonds. These ETFs are a good place to startWhen 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.
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.
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.
Given the global geopolitical situation and the rise in military spending, it would be prudent to hold some defence stocks. The iShares Aerospace & Defense ETFETF, 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.
In the meantime, Canadian investors should maximize their foreign exposure and consider having minimal exposure to Canada – or none at all.