Help clients compare U.S. and Canada

By Dean DiSpalatro | March 6, 2014 | Last updated on March 6, 2014
2 min read

The U.S. market dusted Canada’s last year.

The S&P 500 posted a 32% gain last year, while the TSX advanced by about 13%, says Stephen Carlin, senior portfolio manager of Canadian equities at CIBC Asset Management. He manages the Renaissance Canadian Dividend Fund.

What’s more, that 32% gain is represented in U.S. dollars, he adds. When factoring in the weak Canadian dollar, the rise of U.S. markets was more like 41%.

Read: Investors rely on domestic market to fund retirement

The performance gap between the exchanges is significant, concedes Carlin, but he suggests that clients shouldn’t give up on Canada.

To stop those flocking south, advisors can show people how much index construction impacts overall market returns. They can also recommend that investors look beyond general TSX data when seeking market opportunities.

Read: Canada to grow in 2014

Apples to oranges

When comparing U.S. and Canadian markets, investors should consider what drives index performance in each country, says Carlin.

The top three sectors represented of the TSX are energy, financials and materials, he adds, and together, they make up about 75% of our domestic index.

In contrast, the top three sectors of the S&P 500 are financials, information technology and healthcare. They only make up about 45% of the index, meaning the U.S. market is more balanced and diverse.

Read: Why to be bullish on financials

Drilling down further, Carlin notes that the energy sector has a 25% weighting on the TSX, while it only accounts for 10% of the U.S index. Though energy stocks did gain last year, other strong sectors such as information technology and healthcare are underrepresented in Canada—on the S&P 500, the latter two account for more than 10% each, and they only represent about 2% of the TSX.

Read: Help clients dissect the healthcare sector

The different weighting of the indexes partially accounts for the performance gap between the two countries, says Carlin, who adds, “There are different industries…that are influencing…returns [in the] U.S…When you look at the returns that we’ve generated in Canada,” industry weightings haven’t been as meaningful.

Read: Don’t snub Canada in 2014

Carlin continues, “Even though the TSX was only up 13% in 2013,” you can let clients know about select sectors that are still outperforming. For example, “The industrials segment…was up almost 37%, but [that sector] is relatively small…[There were] a bunch of different industries that produced strong returns [in 2013], but investors [don’t] have a true sense of the strength of [our domestic] economy.”

Along with educating clients about how to compare markets, advisors can discuss whether active management may be valuable when people are investing in less-balanced indexes. Carlin’s example of industrials shows people may have benefited from overweighting minor sectors and underweighting popular, weaker sectors last year.


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Dean DiSpalatro