How to Invest in the Best Canadian Stocks 

Many investors understand the rationale for a diversified portfolio. One way to do this is through diversification within an asset class. For equity investors in the United States, this can mean investing in both growth and value stocks.

It can also mean investing in international stocks. And if investors want that, they need look no further than our neighbor to the north. Canada has a number of stocks for investors to consider. This article focuses on strategies that investors can use when looking to invest in Canadian stocks.

Why Buy Canadian Stocks?

There are a few reasons for investors to consider Canadian equities as part of their diversification strategy:

A large sector for natural resources – The sheer size of the country and its location let investors know that it is an area rich in natural resources. It also means that the country has a source of present and future wealth.

An advanced skill-based economy – In this respect, Canada is similar to other western nations. The difference is that these skill-based jobs are not as common in a country with so many natural resources.

stability – Canada is not spared from issues impacting the global economy. However, the country is known for stable fiscal and business policies that have kept the economy relatively stable. This Goldilocks economy has meant that many Canadian stocks have not experienced the outsized growth of some US stocks. However, it also comes with some downside risk protection.

How have Canadian stocks fared?

According to S&P Global Market Intelligence, there was a time when US stocks and Canadian stocks performed almost identically. Here is a chart showing the performance of the S&P 500 Index compared to the TSX Index

Source: S&P Global Market Intelligence

You can see that the two indices have performed remarkably similarly, with a few exceptions. That changed around 2012 and Canadian stocks became less attractive.

Source: S&P Global Market Intelligence

This discrepancy is largely due to one sector, technology. However, Canadian tech stocks are on the rise. And in 2022, the country is benefiting from renewed interest in commodity stocks as well as a surge in commodity prices.

What Are the Best Sectors of Canadian Stocks?

For a variety of reasons, financials, materials, and energy stocks are among the best performing stocks in September 2022. Here’s a quick rundown of each sector and some of the top names for investors to consider.

Financially – Similar to the United States, Canada has a strong banking industry. Many Canadian banks have strong track records that can add long-term value to a portfolio. And some of these stocks pay dividends with attractive yields for investors.

This sector accounts for the largest share of the TSX at around 30%. And the Royal Bank of Canada (NYSE:RY)is the most heavily weighted constituent in the TSX. Aside from the Royal Bank of Canada, other top-performing Canadian financial stocks include:

Materials and Mining – Canadian stocks can be an ideal choice for investors looking to diversify into gold and precious metals without owning the physical metal. Canada has a large resource sector. It is therefore not surprising that there are a number of gold mining companies of Canadian origin. This sector also gives investors access to other components in the mining and agriculture sectors. This sector accounts for about 11.5% of the TSX. Some of the top Canadian resource and mining stocks are:

Energy – Canadian stocks offer both traditional fossil fuel-based energy stocks and some renewable energy stocks. This sector accounts for about 18.5% of the TSX. Some of the top Canadian energy stocks are:

technology – As mentioned earlier, technology stocks have been largely the preserve of the United States. As a testament to this, IT stocks make up only about 5.5% of the TSX. However, there are some Canadian companies that have become stars in the emerging new economy. Some of the better known names are:

What Are the Risks of Investing in Canadian Stocks?

One concern about investing in Canadian stocks is that they can be heavily weighted in cyclical industries. For example, in February 2022, financials (33.5%), energy (14.8%) and industrials (11.7%) made up almost 60% of the index. That may be too much for some investors, given that these sectors are all roughly correlated with the business cycle. But as a long-term investment, Canadian stocks are worth considering with a small portion of your portfolio.

How to buy Canadian stocks

Buy individual stocks on an exchange

Hundreds of Canadian stocks are dual listed on either the New York Stock Exchange (NYSE) or NASDAQ. This is the most convenient way to get into Canadian stocks as there are no barriers to stock ownership. These shares can be bought directly on the stock exchange in US dollars, just like buying a US stock.

However, for a complete list of the best Canadian stocks, investors should check out the Toronto Stock Exchange (TSX). The TSX is one of the oldest stock exchanges, having been founded in 1852. It is also the third largest exchange in North America by market capitalization.

The Toronto Stock Exchange comprises approximately 1,500 companies. It allows investors to trade stocks, mutual funds, exchange-traded products, bonds, commodities, futures, options, and other derivative products. All transactions on the TSX are executed in Canadian dollars.

Invest in a mutual fund or ETF

There are many mutual funds and exchange traded funds that offer exposure to Canadian equities. Some funds offer exposure to both US and Canadian equities. Other funds only hold Canadian stocks. Some examples of this are:

• BMO S&P/TSX Capped Composite Index ETF
• Horizons S&P/TSX 60™ Index ETF
• Vanguard FTSE Canada All Cap ETF

As with investing in any asset class, investors must consider their investment objective, time horizon and risk tolerance before selecting a fund that suits their needs. Investors should also pay attention to the fund’s fee structure to ensure you are using your capital as efficiently as possible.

The Final Word on Investing in Canadian Stocks

Investing in Canadian stocks is a way for investors to diversify their portfolio. MarketBeat offers a list of the top Canadian stocks traded on the TSX. This is the Canadian version of the NYSE or NASDAQ in the United States and contains many of the same stocks.

One benefit of investing in Canadian stocks is that many are dual listed, removing many of the barriers that can come with investing in international stocks.

However, investors should be aware that many of the best Canadian stocks are in highly cyclical sectors, which can result in underperformance when those sectors are not popular. Still, Canadian stocks can have a place in an investor’s portfolio because of their relative stability and, in some cases, an impressive dividend.

Whoever coined the phrase that patience is a virtue has probably never invested in the stock market. It can be excruciating when a stock’s price falls. And that’s especially true when the stock hit what may have been an all-time high just a year ago.

Here’s the good news. In some cases, the reasons you liked the stock still exist. If that’s true, then there’s reason to believe the stock price could recover.

The bad news is that there’s no way of knowing exactly when that will be. And anyone who claims that is not telling the truth.

So what should an investor do? We believe the answer must be selective. And for now, that means looking at the best-in-class stocks that are built to weather recessions.

In this special presentation, we’ll introduce you to seven stocks to consider if you’re looking for safe stocks that offer growth opportunities and pay a dividend to boot. Here are 7 recession-proof stocks to wait out this bear market.

Check out the “10 recession-proof stocks to wait for the bear in.”