How to Invest in Canadian Stocks and Bonds

Canada is one of the wealthiest nations in the world, with a nominal gross domestic product (GDP) of approximately $1.64 trillion. While the service industry dominates its economy, the country's extensive natural resources drive its exports. These factors have helped make Canada one of the premier global investment destinations, particularly for U.S. investors.

Investors can purchase Canadian stocks and bonds in a few different ways. Canadian stocks and bonds can be purchased directly on the Toronto Stock Exchange (TSX), the Canadian Securities Exchange (CSE, formerly the Canadian National Stock Exchange), or other Canadian stock exchanges.

Alternatively, investors can easily gain exposure to Canadian stocks and bonds through exchange-traded funds (ETFs) or American depositary receipts (ADRs) on U.S. exchanges.

Speculating on Canada

Canada is considered to be one of the safest countries in the world, with a strong natural resource base and a stable monetary policy. It is a robust polity with a low budget deficit.

Investors may want to be wary of the country's strong ties to the U.S., which can mitigate the beneficial effects of diversification. The country's natural resources sector makes it susceptible to often-volatile commodity price movements.

Benefits of Investing in Canada

Canada has an extensive natural resource base that ranges from precious metals to crude oil. These resources have allowed the country to export energy while sustaining itself at the same time.

Natural resource-based economies are generally afflicted by fluctuating rates of inflation due to the volatility of energy prices (often referred to as the "Resources Curse"). Historically Canada has had a very stable rate of inflation, despite its enormous resource base. This is partially due to its tighter monetary policy with target interest rates of 2% and more conservative bailout policies. Although, investors should be aware that at the end of 2021 and into 2022, the rate of inflation has spiked higher than it has in decades.

Canada has regularly posted low budgetary deficits. However, with the emergence of Covid-19, many countries have experienced higher than average deficits. Canada was no exception. In 2019 they had a budgetary deficit of just 1.8%, but in 2020 it rose dramatically to 14.8%. While the U.S. budget deficit in 2019 was 4.6% and 14.9% in 2020. Investors shouldn't worry too much as previously, in 2018, Canada was able to post a budget surplus of 0.1%, while at the same time the U.S. deficit amounted to 3.9% of the GDP.

Canada also compares quite favorably with many European and Asian countries, which means a more manageable long-term outlook and fiscal stability.

U.S.-based venture capitalists are moving to Canada, with $1.372 million (2019) indicating that Canadian startups are becoming a popular investment among U.S. investors.

Risks of Investing in Canada

Canada's economy is strongly correlated to that of the U.S. as its largest trading partner, which means that the country might not offer as much diversification for U.S. investors as other markets might. Canada's economy derives much of its strength from natural resource commodities. The country does not have a competitive level of research and development.

Invest in Canada With ETFs and ADRs

The easiest way to invest in Canada is through U.S.-listed Canadian ETFs and ADRs. Canadian ETFs enable investors to buy single securities that give them exposure to hundreds of stocks.

These ETFs can track the entire Canadian economy or specific industries. Conversely, ADRs give investors the ability to buy into individual Canadian companies without the hassle of transacting on a foreign exchange.

Here are some popular Canadian ETFs:

• Canada Energy Income ETF (NYSE: ENY)
• MSCI Canada Index Fund (NYSE: EWC)
• IQ Canada Small Cap ETF (NYSE: CNDA)
• S&P/TSX Venture 30 Canada ETF (NYSE: TSXV)
• Market Vectors Junior Gold Miners ETF (NYSE: GDXJ)

Here are some popular Canadian ADRs:

• Bank of Montreal (NYSE: BMO)
• Brookfield Office Properties Inc. (NYSE: BPO)
• Canadian Natural Resource Ltd. (NYSE: CNQ)
• Imperial Oil Limited (AMEX: IMO)
• Canadian National Railway (NYSE: CNI)

Investing in Canadian Stocks and Bonds

Investors who prefer a more hands-on approach can purchase Canadian stocks and bonds directly through the Toronto Stock Exchange, Canadian Securities Exchange, or other Canadian stock exchanges.

Some U.S. stock platforms, like E*Trade, support trading on the TSX and TSXV exchanges, but other U.S. brokerage houses might not support such functionality.

Most of the largest companies trading in Canada are listed in the S&P/TSX 60 Index, while up-and-coming companies are listed on the TSX Venture 50 Index. As a result, investors who are looking for a good starting point when investing in Canadian stocks may want to browse through those companies first. Many junior mining companies are also popular among international investors.

Investors who take this route should be aware of the legal and tax implications. The capital gains and income tax rates for investments in Canada may differ from those in the United States. Investors should talk to their financial advisor or another investment professional to determine the extent of these differences and how to handle foreign taxes.

The Bottom Line

Canada offers investors an attractive opportunity to invest in a robust economy with extensive natural resources. Those who are interested in adding Canadian exposure to their portfolios can do so with ETFs, ADRs, or direct foreign investments using most popular brokerage services.