International flavour: Canadian investors may want to make like Ottawa, diversify beyond U.S.

Canada is learning the hard way about the dangers of putting too many eggs in its U.S. economic basket.

Much has been made about the need to diversify our economy away from the United States.

Diversification is understandably beneficial. The more varied streams of revenue a nation has, the less affected the economy will be when one of those sources is interrupted.

The same can be said about investment portfolios.

Diversification can cast a wide net, allowing investors to reap profits across different asset classes (stocks and bonds), industries, companies and, of course, geographies.

Canadian investors typically have a “home country bias” and, when they do seek international exposure, their focus is on U.S. stocks, says Warren Hastings, managing director of investment strategy with Scotia Wealth Management in Toronto. “That’s actually true for investors around the world in general.”

Investors have good reason for enjoying home cooking. Canadians, for example, can invest in Canadian and U.S. stocks and bonds with relative ease. And the North American mix has been a profitable recipe.

The U.S. equity market has led the world for much of the last 15-plus years. It also makes up about 70 per cent of the total market capitalization (number of traded shares multiplied by their prices) of all stocks on Earth.

The Canadian stock market only accounts for about three per cent of all global equity assets, but since 2025, the S&P TSX Composite Index has outperformed the U.S. S&P 500 by 17 percentage points.

Despite our southern neighbour’s erratic behaviour, U.S. stock exposure is never a bad bet.

Yet too much of a good thing applies.

The U.S. stock market and its economy present an “idiosyncratic risk” because it, too, suffers from over-concentration in technology companies — especially those involved in artificial intelligence, which make up nearly 40 per cent of the market’s value, says Laurent Boukobza, vice-president and ETF strategist at Mackenzie Investments.

“The U.S. is still the biggest equity market in the world, so every investor tends to be a little bit overweight on the U.S.”

Yet he acknowledges its risks are mounting: U.S. leadership is increasingly erratic. The nation is stuck in a war it started with no end in sight; that war sparked higher-than-desired inflation due to rising energy prices, and U.S. bond yields have been surging.

All of these factors could drag its economy and markets down, Boukobza says.

Canadian investors are paying attention.

Year to date, Canadians’ capital flows into international equities exchange-traded funds (ETFs), for example, have already exceeded all of 2025’s total, data from TD Securities Ltd. show.

That said, flows to Canadian and U.S. ETFs are also up over last year’s totals.

“Growth is across the board,” says Casey Yang, director of ETF sales and strategy for TD Securities Inc.

One challenge for investors is navigating a landscape of hundreds of choices of funds — be it ETF or mutual fund.

To start, international markets can be broken down into two key geographical areas. One is summed up with an acronym: EAFE.

This stands for Europe, Australia and the “Far East.” Funds with this focus offer exposure to so-called developed economies much like Japan, the United Kingdom and Germany.

Through EAFE funds investors can gain access to luxury goods manufacturer LVMH (Moët Hennessy Louis Vuitton) in France, and the world’s largest carmaker, Toyota Motor Corp., in Japan.

The other large international segment is the emerging markets, which includes China, India, Taiwan and South Korea among others. These are “developing economies” despite many rivalling developed economies in their size.

Active management — security selection — is often very beneficial in international markets compared with a passive approach involving owning entire markets that include many lower-quality companies, Hastings says. “Capital always flows wherever it’s treated best.”

High-quality companies with sustainable competitive advantages, clean balance sheets and growing profitability “can be found anywhere” and inevitably attract investor dollars, he adds.

For Canadian investors who prefer to own individual companies, they can add international stocks using American depository receipts (ADRs) and Canadian depository receipts (CDRs).

These offer access to foreign companies trading on foreign stock markets through U.S. and Canadian stock exchanges.

Most investors, however, invest in ETFs and mutual funds for international diversification.

Today’s ETFs increasingly include actively managed funds. Among them is Mackenzie’s GQE Global Equity ETF. It has outperformed its benchmark since 2017, based on data from Morningstar.

Broadly speaking, international markets have recently outperformed the U.S. Last year, international outpaced the U.S. by nearly 13 percentage points, Boukobza says.

That doesn’t guarantee future outperformance, but “the argument of diversification is you don’t need to predict which country or market will be the winner.”

Just own them all, so the theory goes.

Investors can concentrate on specific geographies they believe will benefit and grow more from themes like artificial intelligence through several single-nation ETFs, including Global X’s Korea KOSPI 200 Index ETF (KORX). It launched in Canada this past month.

“Interest in South Korea has really spiked mainly from AI,” says Ken Chen, portfolio manager of index strategies at Global X in Toronto.

The ETF provides exposure to South Korea’s largest 200 publicly traded companies, including Samsung Electronics and SK Hynix, two major semiconductor and memory manufacturers. The index is up more than 100 per cent over the last year, but it is still undervalued compared with the S&P 500.

What makes South Korea attractive, he adds, is its advanced manufacturing prowess in defence, electronics, automobiles and shipbuilding.

South Korea is also part of the “friend-shoring” movement among Canada and other middle powers as the U.S., China and Russia try to make imperialism great again, he says.

No matter it’s done, geographical diversification is worth exploring — if only to increase the number of baskets holding your eggs, Hastings says. “That way, it’s not an existential crisis if there’s an idiosyncratic risk that arises with any one market.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com