Home country bias refers to the tendency of equity investors to overweight domestic securities at the expense of international stocks.
It’s important to remember that Canada represents just 3% of capital markets in the world, according to Bloomberg data as of June 30, 2024.1 This means investors will have to add exposure to international markets to access the other 97% of investment opportunities.
International equity exposure may help enhance portfolios by serving as a diversifier, which can potentially mitigate some volatility. When Canadian equities are underperforming, another region could be performing better, potentially helping to offset losses.
There are implications for portfolios that are overexposed to Canadian equities. For one, home country bias may contribute to risk due to security concentration. Additionally, the sector concentration of the Canadian market is worth consideration.
Investors may not realize how much influence a handful of companies have on the Canadian market. Canadian equity markets exhibit a greater level of concentration compared to the global equity market, with the top 10 companies in Canada making up around 37% of the market, according to Morningstar.
Additionally, Canada is more concentrated than the global market in three sectors: energy, financials, and materials.2 This means Canadian investors with home country bias may be underweighting the technology, healthcare, consumer discretionary, and consumer staples sectors, among others, potentially missing out on opportunities.
Understanding Different International Equity Exposure
International equity exposures are generally broken into three categories: global, developed international, and emerging market. It’s important to note that different fund issuers may have slightly different criteria for each category.
Generally, countries are classified as either developed or developing based on gross domestic product, gross national income per capita, industrialization and technological infrastructure, standard of living, as well as other potential factors.
Global exposure is typically the broadest classification. Typically, global equity funds invest in companies located anywhere in the world, including Canada. On the other hand, international equity funds tend to invest in companies around the world, excluding Canada.
Developed international exposure might include any of the 36 countries that were classified as developed in 2024 by the United Nations. These countries were all located in North America, Europe, or developed Asia-Pacific per the UN.
Emerging markets are the economies of developing countries. Brazil, Russia, India, China, and South Africa are considered the largest emerging markets in the world; however, there are 125 developing economies throughout the world as of 2024, according to the UN.
Compared to developed international countries, emerging markets may offer higher growth potential with heightened volatility, as these countries have less developed economies.
Investors may be able to enhance returns and mitigate risk by diversifying with developed international and emerging market exposure.
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1, 2 Canadians reducing home country bias, eh?, Vanguard, June 2024, https://www.vanguard.ca/content/dam/intl/americas/canada/en/documents/HOBI_052024_infographic_V5_sc.pdf.
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