One way to diversify your investment portfolio is to invest in the shares of companies that are located outside of the United States. And when it comes to international investing, one of the most popular countries among many U.S. investors is our friendly neighbor to the north: Canada.
There are many potential benefits to U.S. investors of investing in Canadian companies. In fact, about 40 percent of the volume traded on the Toronto Stock Exchange, Canada’s largest stock exchange, originates from outside Canada.
For starters, Canada is generally considered one of the safest countries in the world from a geopolitical perspective, with a stable monetary policy and inflation rate and low budget deficit. One of its greatest national strengths in Canada’s extensive natural resource base, which enables it to avoid the energy and subsequent economic problems faced by many nations that are natural-resource-poor.
But how do you go about actually investing in Canadian companies? There are several different routes you can take to buy and sell Canadian securities. The simplest option is to invest through U.S.-listed Canadian exchange-traded funds (ETFs) and American Depositary Receipts (ADRs). These can easily be bought through a U.S. brokerage account or U.S. online trading platform like E*Trade or AmeriTrade.
Canadian ETFs are similar to U.S. ETFs — they enable you to gain exposure to hundreds of different Canadian companies by purchasing just one fund. You can buy Canadian EFTs that track the overall Canadian economy or specific industries in Canada, like mining or crude oil, for example.
With a Canadian ADR, meanwhile, you can buy shares of individual Canadian companies without having to go through one of the Canadian stock exchanges, which usually requires opening a foreign brokerage account. ADRs were created to make it easier for U.S. citizens to invest directly in companies located overseas. With a Canadian ADR, you technically don’t own the Canadian stock; instead, you are entitled to own the shares that are held on your behalf at a depositary bank.
If you would like to take a more hands-on approach to investing in Canadian companies by buying and selling shares directly on one of the Canadian stock exchanges, you will probably need to open a foreign brokerage account in Canada through a Canadian stockbroker. Along with the Toronto Stock Exchange (TSE), the Vancouver Stock Exchange (VX) and the Montreal Stock Exchange (MSE) are two other major stock exchanges in Canada on which you can buy and sell the securities of publicly traded Canadian companies.
If you would like to add shares of companies based in Canada to your portfolio, your best bet will probably be to invest in Canadian ETFs and ADRs. Doing so will give you potential exposure to the thousands of publicly traded companies in Canada, which can add an additional layer of diversification to your portfolio.