When Index Investing, I Skip the TSX

Canada is great. Its major stock market index is not.

canadian flag.jpg
A diverse nation with an undiversified index.

Passive investing is in, active investing is out. The literature is all there, frequently citing how a passive fund tracking the major international indices will frequently outperform actively managed mutual funds. Those passive index funds also have lower management fees, to boot.

I’ll admit, I’m a big index investing fan. Stock picking is arduous work, needing hours upon hours of research. In fact, I’m already invested in both the S&P 500 index and the international index that tracks mostly Europe, Japan and other parts of Asia. Both have done incredibly well for me through the power of dollar-cost averaging, netting me a return of over 9.2% since starting in September of 2016.

But the one place I dare not index invest is my home and native land of Canada. Before you accuse me of being unpatriotic, I should mention that over 50% of my portfolio sits in Canadian equities, all of which I’ve handpicked on my own.

Isn’t stock picking dangerous and a waste of time?

Yes and no. Yes because you can never dedicate as much time to research as actual research analysts. No, because in Canada, our stocks are pretty straightforward. Just look at the sector breakdown:



Financial Services




Basic Materials


Industrial Services






Consumer Services


Consumer Goods


Industrial Goods




Notice anything? 52% of a traditional Canadian index fund is holding financial services and energy, making it probably the most undiversified index available. After all, isn’t the whole goal of index investing to get diversified easily? Most shocking is the considerable lack of consumer goods and healthcare holdings at less than 3% combined!

Comparably, the S&P 500 is 24% technology, 17% financial services, 13% healthcare, and 12% consumer services to start. Talk about a broader range!

The TSX is generally an underperforming index

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The TSX is a generally underperforming index. This is the past 9 year performance. Even if you held through the Great Recession, you’re still only up 4.5%.

In 2008 before the financial crisis, the TSX was at 15,073. After a six-year recovery in 2014, the TSX was sitting at 15,625. As of June 2017, it hit its all time high of 15,943 before retreating. If you held the TSX index for that period of just under 10 years, you’d be sitting on a 5.8% total return. Even though past performance never indicates future performance, the major reason for the TSX’s underperformance is it’s generally too reliant on industrials and energy, industries that are fading fast in the global economy.

As a Canadian, you don’t have to worry about currency risk

If you’re from the true north strong and free, you’re making Canadian dollars which makes it easier for you to buy Canadian stocks. Any other foreign index you’re looking at trading into USD, British pound, Japanese yen, etc. These costs, just for the right to buy an individual foreign stock, are especially punitive.

Building a Canadian stock portfolio is easier than any other country

The popular FTSE Canada All Cap Index ETF (VCN) offered by Vanguard holds 225 different equities. Other major TSX index funds sometimes will hold just 60. Either way, these holdings are a fraction of what you can get in the S&P 500 and international index (944 holdings).

What this means is that our tiny Canadian stock market actually makes it easier to make good choices. The TSX index fund’s largest holding is financial services and if you’re a Canuck, you already know what the major five banks are. Energy? Easy: Suncor and Enbridge. Telecoms? Rogers, Bell, and Telus.

Simply put: Canada is a straightforward place to understand when it comes to knowing what major companies call this country home.

So how am I performing?

In the past 12 months, my Canadian holdings have outperformed the Canadian index by about 3.5%. And for the record: I’m not a speculative stock picker and instead stick to the major Canadian brands: Bell, Telus, Enbridge, Dollarama, Cineplex, Loblaws, etc. with some smaller caps too. So instead of holding over 50% in banks and energy, I have greater weight on consumer goods, healthcare (boomers, anyone?), and consumer services – all categories that are noticeably underweight in a traditional TSX index fund.

There are of course some finer issues with my approach: entry and exit costs will be higher, since holding an ETF you could sell your entire Canadian index holding in one transaction. Instead I’m sitting on at least 15 transactions if I wanted to divest myself of my Canadian investments.

Still, I think those future trading costs are worth it, especially when you consider how poorly the TSX index performs due to the Canadian economy’s fundamental flaws and over-reliance on certain sectors.

For a country as great as Canada, it’s quite easy to make your portfolio just like its population: diverse. A TSX index fund certainly won’t do that for you.

Want to learn more about investing? Check out these posts:

  1. A Guide to Dollar-Cost Averaging
  2. Even though I have a pension, I still buy bonds.

Author: stretchingeverydollar

Starving artist to Debt Free MBA. Attempting to retire early.

5 thoughts on “When Index Investing, I Skip the TSX”

  1. There is one good reason to invest in Canada – the dividend tax credit. Investors with a taxable income of between $25,000 – $46,000 in Ontario actually pay negative tax on dividends. Between $46,000-$75,000 the tax rate is 9%. So buy a dividend ETF like XDV that pays 4%+ or individual stocks such as pipelines or telcos that pay around 5%.


    1. That’s a great suggestion for an income investor! Canadians certainly get the benefit of the 50% of marginal rate capital gains tax and dividend tax credit. Dividend tax gets a little punitive for higher income earners, but especially valuable for those on a moderate income.


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