American Vs Canadian Markets: Which Is More Remarkably Attractive?

Disclaimer: I am not a financial or tax advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “American Vs Canadian Markets: Which Is More Remarkably Attractive? serves as educational content, not investing advice.

Cover Image by Clker-Free-Vector-Images from Pixabay

By now, you either have some or a decent understanding of the stock market, what account you should open, and how much you are willing to trade.

But have you ever considered which market you should invest in? Should you “stay true” to your country or instead bet on the U.S.?

I even wish I could give you a definitive answer of which market is better, but that’s where this writing comes to you today. I want to do a brief analysis of each market to determine a clear-cut winner.

Even then, I don’t know if there is a clear winner but instead based on a personal choice.

There’s nothing wrong with investing in both countries’ markets either. I’m sure there’s some argument for diversifying your portfolio by investing in foreign markets.

Hopefully, once and for all, let’s determine which market can be better for Canadians to invest in.

 Canadian Stock Market Performance:

According to Edward Jones, from 1960 – 2020, the S&P/TSX (Cdn) Composite average annual return has been 9.3%. 9.3% is an outstanding return for any investment in general, let alone just a sign of the growth the market and sectors have experienced from that time.

But how is this reflected in terms of a dollar amount? Well, let’s assume that Serge held this type of investment for 5-, 10-, 20-, and 30-year intervals. He decides to contribute $10,000 to his TFSA but would never contribute anything more during any selected periods.

Here’s what the investment would look like:

Beginning Investment:Length (years):Yearly Return:Total Return:Ending Value of Investment
$10,0005  9.3%$5,599.15$15,599.15
$10,000109.3%$14,333.33$24,333.33
$10,000209.3%$49,211.11$59,211.11
$10,000309.3%$134,080.38$144,080.38

Are we to state that these are lucrative returns? Yes, we certainly are. But, there is one factor we are missing here. That is what investment is this? Is it a stock? An ETF? Mutual fund? Because if it’s a managed security, like a mutual fund or an ETF, then well, the return Serge will earn will decrease because we are not taking into account any fees.

Nonetheless, many investors, including myself, would be thrilled to find an investment that yields a yearly return of such an amount. But how does this compare to the returns of the American market over a similar period?

American Stock market performance:

Looking at the DOW Jones Industrial Average over the past 50 years, it has yielded an average return of 10.9%. This amount also does not reflect any fees, nor does it reflect inflation. Remember, inflation is like a stealth tax, has things increase in price over time, your money becomes worthless, which means the value of investments also becomes worth less.

Let’s look at how these returns stack up against the S&P/TSX returns over the same period and scenario.

Beginning Investment:Length (years):Yearly Return:Total Return:Ending Value of Investment
$10,0005  10.9%$6,774.81$16,774.81
$10,0001010.9%$18,139.44$28,139.44
$10,0002010.9%$69,182.81$79,182.81
$10,0003010.9%$212,816.01$222,816.01

Now, when you look at these returns, your eyes might be bulging out of their skull. The difference is also staggering because the 1.6% makes an enormous difference in the amount one can earn through a year. That’s why you may always hear that any small amount adds up over time. This is an attribute of that lesson.

So the actual difference in a dollar figure is:

Period:Difference (U.S. Returns – C.A. Returns)
5 years$1,175.66
10 years$3,806.11
20 years$19,971.70
30 years$78,735.63

Performance of popular Canadian indexes:

I thought it would be interesting to compare some of the popular Canadian Indexes and how they fared over a certain amount of time.

While we do have an idea of how well the S&P/TSX index has performed over a certain period, it does not indicate how well all indexes did. Some may have performed better or worse.

S&P/TSX 60 Index:

First, what is the S&P/TSX 60 index? Well, this index comprises the 60 largest companies listed on the Toronto Stock Exchange. It covers a variety of sectors, which include:

  • Financials
  • Energy
  • Materials
  • Industrials
  • Consumer Staples
  • Information Technology

While we can discuss this large-cap index in more detail, let’s have a look at its past performance:

Years:Average Annual Returns:
311.68%
510.38%
109.39%
Since Inception7.82%

S&P/TSX Completion Index

This particular index includes equities that are not included explicitly in the S&P/TSX 60 Index, which I believe consists of a majority of midcap stocks.

Here’s a look at its previous performance over specific periods:

Years:Average Annual Returns:
38.74%
56.95%
106.69%
Since Inception6.61%

S&P/TSX SmallCap Index

This index is, well, you’ve probably guessed it by now, an index that focuses on a large portion of the small-cap stocks that are on the Toronto Stock Exchange.

Now for its past performance:

Years:Average Annual Returns:
39.33%
55.76%
105.30%
Since Inception2.46%

Performance of Popular American Indexes:

S&P 500 Index

Now, if you’re not familiar with this index, then well, you either have been not watching any financial-related content or are just starting out.

The S&P 500 is one of the most popular indexes globally, where it tracks the 500 largest listed companies on the U.S. stock market. This means you will see Apple, Amazon, Microsoft, and many other large corporations included in this tracking.

But let’s quit all this small talk and have a look at its past performance:

Years:Average Annual Returns:
315.99%
516.90%
1016.63%
Since Inception15.51%

S&P 400 Index:

This is a variation of the S&P 500 index, as it takes the largest 400 mid-cap companies (those who have a market capitalization of between $2 billion and $10 billion) and tracks them.

Some of the companies it tracks include:

  • Papa John’s
  • Dick’s Sporting Goods
  • New York Times Company
  • Harley-Davidson

Its past performance looks like this:

Years:Average Annual Returns:
311.08%
512.97%
1014.72%
Since Inception13.71%

Russell 2000 Index:

I’ve spoken about this index before. It follows 2,000 publicly listed small-cap companies in the U.S. Ideally, investors who may want to capitalize on some small-cap company exposure could always purchase an ETF that tracks this. However, small-cap stocks are generally more volatile, which carries more risk.

Then again, it could offer plenty of rewards.

Here are some companies the Russell 2000 index tracks:

  • AMC
  • Crocs Inc.
  • Biohaven Pharmaceutical

Here also is a look at its past performance:

Years:Average Annual Returns:
310.54%
513.45%
1014.63%
Since Inception12.91%

How The Performances of Each Market Compares:

So now that I have shown up the performances of each market, looking at an overall scale, a large-cap scale, mid-cap scale, and small-cap scale, what’s the verdict? What can we take away from these performances?

In the wise words of legendary investor Benjamin Graham, we should only look at past performance as an idea, not a guarantee of future results. We should also look at more data, which I must admit, I only took a couple of indexes when I could have selected much more.

Yet, I feel justified enough to take such few indexes to make some basic generalizations between the differences of each nation’s markets because of the many companies the indexes follow.

So with that said, we obviously see that the U.S. market beats out the Canadian market. In some comparisons, it’s not even close.

When we can look at the differences between each index, here’s the difference:

Overall Market:

  • Dow Jones beats S&P/TSX 1.6%

Large-cap Companies:

  • The S&P 500 nearly doubles the average annual return of the S&P/TSX 60 since both inceptions

Mid-cap Companies:

  • The S&P 400 index yielded an extra average of 7.1% when compared to the S&P/TSX Completion Index since both inceptions

Small-cap Companies:

  • The Russell 2000 index has returns that are 5x those of the S&P/TSX SmallCap index since both inceptions.

Now let’s take a grain of salt here. Most of these U.S.-based indexes have been around longer than those I selected for Canada. So it may be a little unjust to blatantly state that the U.S. indexes are much better and worthy of our investment.

But even if we use the 3, 5, and 10-year metrics, all U.S.-based indexes still beat their Canadian cohorts.

So with some of this data, while it is brief, I believe that the U.S. market has had better returns over a long period than those in Canada. If I had to toss the flip of a coin, I would think that this remains the same for another 50 years, but this is my own personal prediction, not a professional economic one.

There’s just so much upside with the American market in this case. Most indexes track a more significant number of companies, have lower MERs (which we will touch on in a minute), and have more comprehensive data that gives us a better idea of how the index may continue to perform in the future.

 But yet, there’s still a little more to analyze than just the performances. While investors want the best performance and returns they can get, much more Canadian investors should understand.

Let’s dive a little deeper.

Are costs higher to purchase American securities?

Let’s look at this from an MER standpoint. If you’re not familiar with an MER, an MER stands for a management expense ratio. It’s the cost of holding a mutual fund or ETF that you pay annually.

Usually, the MER is negated from the overall gain you earn during a year. Or if you make losses, it adds to that. So, for example, let’s say Serge earned a 10% overall return on his investments for 2020.

This 10% was earned through holding an ETF that focuses on the S&P 500 index. Well, with an MER of 1.0%, Serge’s net return would be 9% based on the MER alone.

With that out of the way, let’s briefly discuss the average MER for both nations.

Now, personally, I wouldn’t want to pay this much for an MER. I admit, these both are MERs for mutual funds and don’t necessarily include securities like ETFs, which typically have much cheaper MERs compared to mutual funds.

But this does tell us something, doesn’t it? With these stats alone, we should conclude that holding mutual funds in Canada is much more expensive than maintaining a U.S.-based fund.

Does this stack up with actual mutual funds and ETFs? Allow me to pull up a few similar mutual funds and ETFs based in Canada and the U.S.

Canadian Based Mutual Funds/ETFsMERU.S. Based Mutual Funds/ETFsMER
Scotia Canadian Equity Index Fund Series A  1.00%Columbia Mid Cap Index A0.450%
iShares S&P/TSX 60 Index ETF  0.18%iShares Morningstar U.S. Equity ETF  0.03%
VVF S&P 500 Index ETF  0.08%Vanguard S&P 500 ETF  0.03%
T.D. Dividend Growth Fund  2.03%Fidelity® Dividend Growth Fund0.49%
iShares S&P/TSX Composite High Dividend Index ETF  0.22%iShares Core High Dividend ETF  0.08%

Based on these fine examples that are very similar in nature, I can conclude that it costs more to hold Canadian-based funds than U.S.-based funds.

Now, of course, you could look at much more funds than I did, and you’re more than welcome to. But just as a generalization, I’ll believe the stats previously laid out to us.

Foreign currency exchange:

We all are aware of the foreign currency exchange or the USD/CAD exchange that changes daily. Ultimately, this can affect your investment returns.

Specific platforms such as Wealthsimple actually tack on an extra small conversion fee that is around 1.5%. It may come as unfortunate as you have to pay a certain fee against either your purchase or sale of a U.S. stock.

Here’s how the calculation works:

Let’s say Serge wants to buy $1,000 worth of Amazon stock. The conversion fee on Wealthsimple is 1.5%. We’ll say that the CAD/USD conversion rate is 1.25.

The total foreign exchange rate is calculated like this:

  • 1.25 / (1 – 0.015) = 1.269 conversion rate.

So the total cost for Serge to purchase these shares in Amazon is $1,269. Of this amount, he pays $19 ($1,269 – $1,250) in the conversion fee that Wealthsimple charges. Say what you might, but if you were planning to purchase a more enormous amount, it could cost you hundreds of dollars.

Flip the situation around and say that Serge instead wants to sell $1,000 worth of Amazon shares.

The total foreign exchange rate is now calculated as the following:

  • 1.25 x (1 – 0.015) = 1.231 conversion rate

So Serge receives $231.00 from the exchange rate based on this sale. Serge would have paid a fee of around $19.00 for the conversion fees.

As a Canadian investor, this may become a turnoff, especially for those looking to build a long-term portfolio consisting of most U.S.-based securities.

I would consider this a factor in investing heavily into the U.S. markets versus the Canadian markets, despite not being a significant amount. Whether it’s a large factor, well, that totally depends on your own judgment.

Average distribution per country:

With investing in stocks or ETFs, there comes dividends or distributions of interest and other forms of payments for holding securities. But what is the average for each country?

This is a difficult question to answer, as there, of course, are a lot of stocks across each market and a lot of data to process. So in comparison, let’s look at the S&P 500 and the S&P/TSX.

The dividend paid in 2020 for the S&P 500 was $2.68. The dividend paid in 2020 for the S&P/TSX Composite was $2.316.

Here we give the edge to the American stock market, given that not only is the amount greater on paper, but the amount is in USD. Therefore, it would be higher depending on the exchange rate whenever the dividend or dividends have been paid out.

Another advantage of investing in the U.S. stock market is that when the exchange rate is lower, you earn more on your dividend in terms of CAD.

Of course, each stock, mutual fund, ETF, or other public security or debt will vary depending on the amount of distribution they payout. It could always be higher or lower compared to a differing nation’s counterpart.

So, you may find U.S.-based stocks that pay a lower dividend than the ones in Canada. This is just for a perspective which we will use as an average for a final calculation later.

It’s not a general indication of if the U.S. markets pay higher than the Canadian markets.

How many companies are listed on the markets in Canada and the U.S.?

I think this is a fascinating question to ask, but a simple one to answer.

In the U.S. alone during 2019, 4,266 public companies were trading on their stock market.

Meanwhile, in 2020, there were 3,922 companies listed on the Canadian exchange.

Indeed, there is plenty of variety to choose from in both exchanges, so we cannot deny that. Nonetheless, it is an interesting stat, and hopefully, we all can find one company to invest in. If all companies were overvalued, well then, that would be a lot of research done to estimate that, and it would be disappointing.

Should I Buy Canadian or US Stocks?

We’ve now come down to the golden question. At the end of the day, which exchange is better to invest in?

I want to do a couple of calculations based on some of the research I’ve conducted throughout this article to help determine which market may be better.

Just bear in mind that these are hypothetical situations. While they could represent a real-life situation, there is no indication that they will. I’m not a financial advisor, and this entire article is for research and education purposes only. It shouldn’t be served as investment advice.

Do you know those figures we used for our first calculation above? Well, we’re going to use them here as I’m giving the U.S. stock market the advantage based on a better historical performance.

However, this time around, our average annual return is going to be different. Since we have some crucial information like the average MER and conversion fees.

Canadian -Based Example:

Let’s start with the returns replicated from the S&P/TSX Composite Index.

They will remain to be 9.3%. However, this time around, we will assume that Serge is holding a mutual fund that follows the index very closely.

The MER for this mutual fund is 2.53%. Meaning now the average annual return is 6.77% (9.3% – 2.53%).

I’m going to assume the average inflation rate in this case to be 2%. So, since inflation decreases the rate of return we earn every year, our new yearly return is 4.77% (6.77% – 2%).

Lastly, we are assuming that Serge reinvests all of his distributions from this fund. We’ll use the dividend yield from the iShares Core S&P/TSX Capped Composite Index ETF, 2.47%. I know, I know, I’m mixing ETF data with mutual fund data, but this is a hypothetical situation, isn’t it?

Our final average annual return will be 7.24%. This has now been adjusted for inflation, distributions, and the MER for holding the fund.

Now, let’s look at 5-, 10-, 20-, and 30-year intervals to see how much the investment will grow over time.

Beginning Investment:Length (years):Yearly Return:Total Return:Ending Value of Investment
$10,0005  7.24%$4,183.52$14,183.52
$10,000107.24%$10,117.22$20,117.22
$10,000207.24%$30,470.27$40,470.27
$10,000307.24%$71,414.95$81,414.95

U.S.-Based Example:

Let’s compare it with a U.S.-based investment. Here’s what we know regarding the U.S. investment:

  • The average return for the Dow Jones over the past 50 years is 10.9%
  • The average MER for mutual funds has been 1.3%
  • Inflation will remain the same in this situation, as 2%
  • The distribution yield for the SPDR Dow Jones Industrial Average ETF Trust is 1.61%, which we will use as the yield in this scenario.

Here’s what the net average yearly return looks like: 10.9% – 1.3% – 2% + 1.61% = 9.21%.

Now, let’s have a look at the investment over time:

Beginning Investment:Length (Years):Yearly Return:Total Return:Ending Value of Investment
$10,0005  9.21%$5,535.03$15,535.03
$10,000109.21%$14,133.71$24,133.71
$10,000209.21%$48,243.59$58,243.59
$10,000309.21%$130,563.39$140,563.39

Now, let’s say, Serge, at the end of these 30 years, decides to withdraw all of these funds. Based on this time frame, the CAD/USD exchange rate was 1.25. He also uses a brokerage that charges a 2% conversion fee on his U.S.-based investments.

The total foreign exchange rate is: 1.25 x (1 – 0.02) = 1.225

He receives a total amount of $172,190.15 based on the exchange rate while paying $3,514.08 on currency conversion fees. Therefore, the net from this investment would be $169,676.07.

Differences between investments:

Length (Years):Yearly Return:Total Return:
51.97%$1,351.51
101.97%$4,016.49
201.97%$17,773.32
301.97%$59,148.44

This ending amount is better by a factor of 1.5 than the total ending amount from the Canadian based investment above when we compare the two. The main reason for this factor is obviously the average annual returns. When you’re looking at holding an investment long-term, even the slightest change in the percentage can vastly affect the portfolio’s performance.

In this case, a 1.97% makes a massive difference in the investment that Serge will receive in the end.

But of course, this is all hypothetical. Indeed we are not always guaranteed an average annual return of 9.21%, and the currency conversion could be vastly changed. Maybe instead of reinvesting the distributions, the individual decides to use the cash to pay for their living expenses or use it for shopping.

Concluding Remarks:

What this does seem to highlight for me, however, is that the U.S.-based exchanges have been more consistent with higher returns over a long time. Not to mention that the average MER for mutual funds is much cheaper than it is in Canada, while the distributions/dividends may be slightly higher.

But should we all focus on just purchasing U.S.-based investments rather than Canadian-based ones? I don’t think so.

There’s nothing wrong with only investing in U.S. securities. Clearly, from some of the research above, I conclude that it seems to be the better investment long-term of the two.

Yet, new companies will always rise through the ranks that provide significantly high returns, which may out beat some of the average market returns over a certain period. New opportunities always arise both in Canada and the U.S., meaning that there isn’t necessarily a wrong choice if you can find these opportunities and capitalize on the gains they will provide.

So personally, I wouldn’t hold out investing in one country rather than another. But for just index-based investing? I would instead go with the U.S.-based funds myself because of what I have analyzed here.

Again, this is what I think, and I would encourage you to do a little more research. I certainly may have forgotten an extra cost here or there, and if I have, please let me know below in the comments.

I hope that you found this information entertaining and insightful. It can be challenging when beginning to invest, especially with deciding what to invest in and where to exactly invest in. I hope this sheds some light for you to continue to search and build your financial knowledge.

I hope everyone is and continues to do well. Thank you for reading.

Disclaimer: I am not a financial or tax advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “American Vs Canadian Markets: Which Is More Remarkably Attractive? serves as educational content, not investing advice.

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