Investing Beyond our Borders: Adding International Equities to Portfolios

Canadian investors love Canada! As a result, portfolios tend to reflect a substantial home country bias. And, as with all biases, it comes at a cost.

Investors often hear about the benefits of diversification, yet they undercut those benefits by staying close to home and heavily overweighting their portfolios to Canadian companies. Canadian equities are highly concentrated within 3 sectors – Financials, Energy and Industrials – while only representing a sliver of the larger global market.¹

In the U.S. the equities sandbox is certainly larger, but recent history has shown that American stocks aren’t producing the kind of diversified growth that is typically attributed to a healthy market. The magnificent 7 phenomenon demonstrates exactly how solitary gains have been, with 7 mega-cap tech companies accounting for over 70% of returns in 2023. That’s a narrow band of stocks, with high concentration risk at premium valuations.

As they plan for the year ahead, we feel prudent investors should look to expand their geographic footprint by adding international exposure for a more complete portfolio. Developed and emerging market equities are a great way to improve diversification while adding upside potential. And it just so happens that international markets are currently more attractively priced than their North American counterparts, offering valuations at generational lows.  

Representing over 20 countries including Japan, U.K., and France, the international developed market space features a diverse array of currencies and is home to some of the best managed companies in the world. The MSCI World Index – representing large and mid-cap companies across 23 developed markets – has a market capitalization of $57.7 trillion, while Canada’s market capitalization represents only 3.14%.² This highlights the scale of diversity that can be accessed through developed markets.

In emerging markets, there are even more reasons for optimism as the space is buzzing with growth potential. Comprised of over 20 countries, the region boasts economic stalwarts like China and India, while also hosting prominent global ‘up and comers’, including Brazil and Taiwan. With valuations at historic lows, the space offers some of the most compelling growth prospects available anywhere in the world, and it’s gaining momentum on the global stage.

Though emerging markets have underperformed developed markets since 2010, changing dynamics are setting the stage for a period of improved performance, as was the case during ‘the lost decade’ between 2000 and 2010, when emerging markets outperformed by a wide margin. Backed by favourable macroeconomic health and demographic tailwinds, the region is primed for rapid economic growth. It’s also increasingly recognized as a leader in innovation, ingenuity, and wealth creation. With several key emerging market countries expected to be among the primary beneficiaries of today’s secular growth trends, you can expect them to play a central role in defining the future of the global economy.

The Franklin International Index ETF (FLUR) and the Franklin Emerging Markets Index ETF (FLEM) are low cost, diversified ways to get foundational exposure to international equities markets. As part of the ‘core and explore’ portfolio construction strategy, both FLUR and FLEM can provide diversified ‘core’ exposure across international markets, while reserving the ‘explore’ flexibility to maneuver across other regions and investment vehicles. Importantly, both FLUR and FLEM are the lowest priced ETFs in their categories, offering Canadians the most affordable way to capture international exposure. ²

While Canada has compelling and familiar investment opportunities, it’s important for investors to be cognizant of home country bias and not limit their diversification benefits and upside potential. Adding international can also reduce volatility and while adding a world of opportunities to your portfolio. So go ahead and love Canada, but don’t be afraid to embrace the rest of the world too!