Find the perfect mix of Canadian equities

Stock markets are notoriously volatile, but somehow international exchanges don’t feel quite as erratic as our own. In 2015, the S&P/TSX Composite Index plunged by 11%, this year it’s up by slightly more than 12% year-to-date. Why the dramatic change? At risk of oversimplifying, our market goes wherever commodity prices go.

With metals, mining and oil all in the doghouse last year—other commodities have done poorly for longer—our market tanked. This year, though, prices have finally clawed back, and then some. Gold, copper, aluminum, oil and others are all up and that’s pushed domestic stocks higher.

For instance, West Texas Intermediate crude’s 21% year-to-date rise has helped the S&P/TSX Capped Energy Index climb 21% since January, while gold’s 24% rise has caused the S&P/TSX Global Gold Index to jump by a whopping 76%.

The smart way to invest in U.S. equities

As welcome as it is to see these sectors rise, it complicates things for Canadian investors, says Vishal Patel, a North America-focused manager with Dynamic Funds. Investors who want to buy into these industries are essentially making a bet on commodities. “You have to ask yourself if, longer term, this is sustainable,” he says. “Is gold going to continue to go up? Figuring out some of these markets, like gold, is one of the toughest things to do.”

Muddying matters is that Canada’s economy is still fairly sluggish, with the IMF expecting GDP to grow by just 1.7% in 2016. Slow growth is causing the Canadian dollar to fall, which can actually help boost exports. But if the employment picture worsens, and Canadians become more financially stretched, then some consumer-focused companies could suffer.

Still, there are a number of bright spots here, says Patel. He’s keen on Canadian companies that have international exposure, and in particular, exposure to the U.S., which continues to see decent growth. Companies like Quebec-based Alimentation Couche-Tard, which has convenience stores and gas stations in the U.S., Europe and Canada, and global label making company CCL Industries, derive a lot of their revenues and growth from outside of the country.

He also likes Dollarama because people tend to shop at discount retailers when the economy weakens. And even if it doesn’t, they’re expanding stores and have added more products to each location, making them a go-to stop for shoppers across the entire income curve. Canada’s banks and telecoms are interesting to Patel too. They’re oligopolies, which is usually positive for stocks, and their services will almost always be needed.

Those looking for health care, technology and other stocks in sectors that are underrepresented here, though, would be better served looking south, says Patel. Those markets are so much bigger in the U.S. with more opportunities and companies to choose from.

Canadians do need to be in our own market–we spend money here and we’re familiar with companies here–but don’t go nuts, warns Patel. The Canadian market is small compared to the rest of the world and that commodity exposure can distort our portfolios.

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Patel suggests putting 30% of one’s North American portfolio in domestic equity and 70% in the U.S. “You want the long-term sustainable companies and while you can get that with, say, the Canadian banks, you also want the Googles and the Microsofts of the world,” he says. “If you’re just in Canada you’re making a call on commodities.”

The easier way to invest in Canadian stocks

Buying Canadian equities is easy in Canada–there are plenty of mutual funds and ETFs to choose from and, of course, any advisor or DIY investor can buy them. The trick is buying a fund that lines up with your view of the market.

If you want to buy the whole market, then you can purchase a Canadian index-tracking ETF. However, that will have a large weighting to financial, energy and materials, since our market is highly concentrated in those three sectors. The same goes for a broad-based Canadian mutual fund. You’ll want to pair any Canadian security with an international, U.S. or European fund to achieve a more diversified portfolio.

If you want to limit your exposure to Canadian commodities, then you may want to purchase a bank or telecom-focused ETF instead or look for managers who put more of their money in sectors other than energy and materials.

“It’s all based on the manager you select,” says Vishal Patel, a North America-focused manager with Dynamic Funds. “Do they have a higher or lower weighting to resources? That’s a big determinant of the fund’s return.”