TSX Underperforming S&P 500

With a market capitalization of $3.5 trillion and 3,502 listed companies, the Toronto Stock Exchange (TSX) is the largest exchange in Canada. It’s also the third largest in North America and the nineth largest in the world.

Unfortunately, the TSX has been underperforming its American counterparts by a wide margin over the last decade. The TSX has actually trailed the S&P 500 in eight of the last 10 years. It’s only early March, but by all accounts, it looks like it will finish behind the S&P 500 again in 2024. The TSX is up a respectable 15.4% year-to-date with the S&P 500 having advanced 23%.

What Is Influencing the TSX?

Over the last decade, U.S. returns have trumped Canadian returns by more than 2.5 to one. That’s not a small number. Especially for Canadian investors looking to beef up their retirement accounts.

And with money managers telling Canadian investors that their portfolios should be equally weighted in Canadian stocks, you have to ask yourself if that should be the case or if an investing portfolio should be weighted more heavily to U.S. stocks.

According to the most recent data, Canadian investors have put over half (55.6%) of their stock portfolio in domestic companies. This big number shouldn’t be a big surprise, investors tend to have a home bias toward investing. Investors in Australia, Japan, and the U.K. also have a strong loyalty for domestic stocks.

With the TSX accounting for just 3% of the global market cap, is it wise to invest so heavily in an index that has been trailing its larger peers south of the border? The answer is yes.

How much a portfolio is weighted to Canadian stocks is up to each individual investor, based on their income, age, and risk tolerance. Some studies have said the optimal weight is 30% while others have said 40%.

Why Invest in Canadian Stocks?

One big reason why Canadian investors like domestic companies is because they’re more familiar with them than other stocks. Two of the biggest sectors of the TSX are financial and energy and feature some of the biggest names in the Canadian economy.

Canadian investors are familiar with the domestic economy and understand how integral these companies are to the Canadian economy. Having these kinds of stocks in a portfolio makes sense.

Canadians are all too familiar with taxes as well, and the tax system is designed to help keep investment dollars at home. For example, dividends paid by Canadian stocks are on the receiving end of preferential tax treatment. Dividends from foreign companies are subject to a withholding tax of up to 15%.

Currency is also an issue. Investing in U.S. stocks means paying in U.S. dollars, and with currency fluctuations, it can end up being costly when buying or selling.

It’s also important to keep in mind that indexes, just like individual stocks, can outperform their peers. The TSX may be underperforming the S&P 500, but this isn’t always the case. From 2000 through 2010, the TSX rallied 39.6% while the S&P 500 lagged with a decline of 24.10%.

During the 1950s and 1970s, the TSX also outperformed the global market. In each case, the strong gains occurred during periods of either high inflation or high commodity prices.

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The TSX has trailed the S&P 500 for much of the last decade, but going back to 1970, returns have been pretty similar with gains of 10% to 12%. That said, according to some strategists, the TSX is poised to outperform the S&P 500 over the next decade. If you’re wondering which Canadian equities could outperform over the next decade, ask the trading professionals at Learn-To-Trade.com.

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