Vanguard's report shows Canadians are diversifying globally, reducing their home bias in equity exposure
Vanguard's latest research report reveals that Canadian investors allocate 50 per cent of their equity exposure to domestic companies, a figure 18 times higher than the global market's 2.7 per cent representation of Canadian assets.
Despite this, Canadians are slowly increasing their global diversification. The home bias in Canada has dropped from 67 per cent in 2012 to just over 50 per cent today. This trend, although less pronounced, is also seen in other developed markets like Australia, Japan, and the US.
Sal D'Angelo, head of Product at Vanguard Investments Canada Inc., notes, “Canadians are showing greater appetite for global equities, which is positive and follows a global investing trend to favour international markets.
He continues, “However, the rate of overexposure to domestic securities is still relatively high. Lack of diversification in your portfolio can lead to sector concentration, greater volatility, and less efficiency with your investments, all of which can contribute to higher risk.”
Home bias refers to the preference of investors to allocate a significant portion of their portfolio to domestic assets while underweighting international investments.
D'Angelo further explains, “Canadian investors have a long-standing belief and pride with investing close to home. This is a sound strategy if that exposure is moderate. Based on our research, we see a reasonable equity balance of around 30 per cent home bias in Canadian securities, and 70 per cent invested in non-domestic markets.”
The report highlights several key findings:
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Portfolios with a high concentration of Canadian stocks can be more volatile.
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Overexposure to the Canadian equity market can lead to less efficient portfolios with increased security and sector concentration risk.
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Allocating too much to one country can result in greater portfolio volatility and a bumpier investment experience.
Vanguard's Asset Allocation ETFs offer a mix of 70 per cent international exposure and 30 per cent allocation to Canada, accessing a diversified universe of over 20,000 securities. Since their launch in 2018, these ETFs have grown to over $13 billion in assets.
