Canadian Stock Market vs US Stock Market: Although though we Canadians enjoy debating with our American neighbors about who makes better beer or plays better hockey, the true debate when it comes to your portfolio is which stock market—the Canadian or the American stock market—produces better returns?
Both the U.S. and Canada are wealthy industrialized nations with dependable civic infrastructure, dependable banking systems, and stable administrations.
That is, despite all recent evidence to the contrary, we don’t have brutal dictators wreaking havoc, we steadfastly trust the financial system with our hard-earned money, and the lights turn on when we flip a switch. We both value people’s ability to be themselves, their freedom of speech, and their ability to live satisfying lives.
These nations also have well entrenched property rights, an advanced legal system, and competitive corporate tax rates, which are perhaps most important in terms of accumulating wealth.
We have a lot in common.
So, are the Canadian and American stock markets comparable or dissimilar to one another? How much more should the typical Canadian invest in Canadian stocks than US stocks?
2023 Canada Vs U.S. Stock Market Update
I’ve chosen to update the following post (which I wrote a couple of years ago).
It’s interesting to notice that in 2022, the Canadian stock market significantly overtook the U.S. stock market, which had been crushing it for several years.
The S&P 500 level ended the year down over 20% at 3,840, while the TSX Composite completed the year down 8.7% at around 19,400.
Although the vast majority of investable assets had a poor year, Canada’s performance was due to a considerably lesser reliance on tech and growth stocks. Nevertheless, so far in 2023, the Canadian market has lagged behind its American counterparts due to the same tiny allocation to tech equities. The TSX Composite Index is only up about 2.5% with the first half of 2023 virtually in the rearview mirror, while the S&P 500 is up about 10% because to a strong tech bounce.
Although it’s difficult to predict what 2023 may bring, I’m prepared to wager that by the time 2024 arrives, the total returns will be pretty comparable. Tech valuations should be more affected by rising interest rates than energy and banking industries. As a result, we ought to observe a slight increase in the convergence of those overall share prices.
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WHAT’S IN A STOCK MARKET ANYWAY?
Technically, the stocks of all listed publicly traded companies in a nation make up its stock market. An index, which is a subset or sampling of the stocks in the entire market, is used to track the performance of a stock market.
A stock market’s largest companies are typically so much larger than the rest of the smaller companies that a sample of the largest companies fairly represents the entire market. However, an index that tracks every single company in a stock market would be the most accurate representation of that market.
The TSX 60 index and the S&P/TSX Composite index are two indices that are often used to reflect the Canadian stock market. The S&P/TSX Composite analyzes around 250 significant Canadian firms, while the TSX 60 tracks 60 of the top corporations in Canada. The most widely used index for illustrating the American stock market, the S&P 500 Index, tracks approximately 500 American corporations.
COMPARING CANADIAN STOCK MARKET RETURNS VERSUS U.S. STOCK MARKET RETURNS
How do the TSX Composite index and the S&P 500 index compare when used as proxy measures for the Canadian and American stock markets, respectively? The TSX Composite level is 19,920, while the S&P 500 level is 4,205 as of this writing.
The index for Canada is now higher!
Canada triumphs! Right?
Wait a minute.
The prices of the stocks that make up an index and the index’s level have a complex relationship. Looking at the index level’s percentage change over time is more illuminating.
The graph that follows contrasts index levels between October 2010 and October 2020. The U.S. index increased by a staggering 176% over that time, while the Canadian index increased by 23%. The U.S. market nearly tripled in size whereas the Canadian market expanded slowly during the preceding 10 years.
For the past ten years, the approximate average annual returns for Canada are 2.1%, and for the United States, they are 10.7%.
Note that dividend payments are not included in these returns, which are determined solely at the index level. Since Canadian stocks normally pay out higher dividends compared to U.S. firms, including dividend distribution would reduce the difference between the results on the Canadian and U.S. stock markets.
Comparing the two markets since 2010, it is evident that the U.S. market has experienced more growth. What about different eras? The following graphs contrast the indices for the two nations over various ten-year time frames.
The Canadian index increased by 30.3% whereas the American index increased by 72.3% from October 2005 and October 2015. For Canada and the U.S., the corresponding average yearly returns are about 2.7% and 5.6%, respectively.
The Canadian index increased by 31.5% from October 2000 to October 2010, while the American index actually decreased by 17.2% during that time. The average annual return for each country is roughly 2.8% for Canada and -1.9% for the United States.
The 2008 financial crisis, which jolted the global financial system, is seen in the two graphs above. Do you recall the ominous atmosphere at the time? Suddenly, that terrifying financial catastrophe appears on the graph as a minor dip.
The Canadian index increased by 132.9% from October 1995 to October 2005, whereas the American index increased by 107.6%. For Canada and the U.S., the corresponding average yearly returns are about 8.8% and 7.6%, respectively.
This decade contains the frenzied technology company speculation during the dot-com bubble in 2000. (seen in the middle of the graph). Between 2000 and 2002, that bubble broke, and a subsequent drop was visible. Yet, both markets have made a significant recovery since 2002, and the night appears to be the darkest before dawn.
The graphs above make it challenging to make firm judgments. Throughout the past ten years, the U.S. stock market has unquestionably surpassed the Canadian stock market, but there have also been times when the Canadian market has outpaced the U.S. market. The time intervals in the graphs above were selected at random.
Finding times in which the Canadian stock market exceeds the US stock market and periods in which the American market outperforms the Canadian market would be simple. Additionally keep in mind that dividend distributions are not shown in the aforementioned graphs (which would slightly favour Canadian dividend stocks).
The battle between the Canadian and American stock markets has no obvious victor as of yet!
Overall, it appears that the markets in Canada and the United States react similarly to major trends and occurrences. Both markets have experienced boom-bust cycles over the past three decades, including the IT bubble, the financial crisis, the recent market drop brought on by a pandemic, and the recovery that followed. The two markets are distinct based on the size of their relative reactions.
CANADA VERSUS U.S. STOCK MARKETS: WHAT’S THE DIFFERENCE?
Many variables are at play in the stock market showdown between Canada and the US. Size is first. You may calculate the market capitalization by adding up the prices of all the stocks in an index and dividing by the number of shares.
The S&P 500 has a market capitalization of little over 32 trillion USD as of 2023, while the TSX Composite has a market capitalization of 2.75 trillion USD.
The currencies used in the Canadian and American markets are also different. The discrepancies between the various market index levels are influenced by changes in the relative prices of the Canadian and American dollars.
The mix of the Canadian and American markets is the third and most crucial distinction. Simply said, the two markets are composed of various businesses operating in various industries.
The financials (28.7%), materials (15.7%), industrials (12.5%), and energy (10.6%) sectors dominate the Canadian market. Information technology (27.4%), healthcare (14.1%), consumer discretionary (11.6%), and communication services (11.2%) dominate the U.S. market.
Looking at the top movers in each index is another approach to get a feel of the various market compositions. These are the firms with the largest market capitalizations (share price divided by share count) in the corresponding index. Currently, banks dominate the top ten list in Canada, while technology corporations rule the top ten list in the United States.
|TSX Composite Top Ten Constituents||S&P 500 Top Ten Constituents|
|Royal Bank of Canada||Apple Inc.|
|Toronto-Dominion Bank||Microsoft Corp|
|Canadian National Railway Company||Amazon.com Inc.|
|Enbridge Inc.||NVIDIA Corporation|
|Canadian Pacific Railway||Berkshire Hathaway|
|Canadian Natural Resources Limited||Meta Platforms (Facebook)|
|Bank of Montreal||Tesla|
|Bank of Nova Scotia||Visa|
|Thomson Reuters Corporation||UnitedHealth Group Incorporated|
The diversity of sectors rather than market size stands out as the most significant distinction between the Canadian and US stock markets. It is crucial to realize that there are numerous sizable private healthcare and technology companies listed on the US stock market.
I believe it’s fair to argue that these two industries provide great potential for long-term growth, and that an investor should have some exposure there in order to fully reap the rewards of diversity.
If you’re anything like me, you’ll want to include a good number of the best Canadian dividend stocks in your portfolio (especially in your non-registered account). From there, you can choose a few significant US technology and healthcare firms, or you can just use a US ETF to gain access to the entire US stock market in a single, convenient purchase.
Our list of the Best ETFs in Canada includes several excellent options for American exposure.
INVESTING IN THE U.S. MARKET FOR CANADIANS
Logging onto a discount brokerage, such as Qtrade, and purchasing an index ETF like XUS (from iShares) or VFV are the simplest ways to invest in the American market (from Vanguard). Both of those ETFs hold US companies and have the S&P 500 index as their primary benchmark. Nonetheless, those ETFs can be bought with Canadian Dollars and are traded on the Canadian Stock Exchange.
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Changes in the Canadian currency’s exchange rate with the US dollar have an impact on XUS and VFV returns from a Canadian perspective. There are U.S. index ETFs with currency hedges that aim to mitigate or smooth out currency volatility.
Examples are Vanguard’s VSP and iShares’ XSP. In general, currency hedged ETFs are not required and may even be wasteful for serious, long-term investors like MDJ readers. This is a topic for a different article.
Other options for more experienced investors include holding their U.S. investments in dollars and purchasing ETFs directly from the American stock exchange.
The tax ramifications of holding U.S.-domiciled equities or ETFs from Canada can be complicated. Even Canada’s tax-sheltered TFSA accounts can’t completely protect a Canadian investor from U.S. dividend withholding taxes.
The most tax-efficient option is to keep U.S. stocks and ETFs in your RRSP account, if you have the space. Check out the free eBook “Can I Retire Yet?” below for more information on where to hold your different sorts of stocks.