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Looking Beyond Canada (and the U.S.)



July 4, 2017

On average, Canadian investors have more than enough Canadian equity exposure, especially in comparison to the importance of Canadian equities on a global level.

According to a robust study by Vanguard Investments Canada Inc., the Canadian equity market represents roughly 3% of the market capitalization of the MSCI World Index, but comprises about 60% of the equity allocation of Canadian investor portfolios. There are a number of problems with this beyond the fact that Canadian investors are largely ignoring the 97% of the world’s stock offerings.

Equity market home bias by country


Note: Data as of December 31, 2014 (the latest available from the International Mentary Fund, or IMF) in U.S. dollars. Domesting investment is calculated by subtracting total foreign investment (as reported by the IMF) in a given country from its market capitalization in the MSCI All Country World Index. Given that the IMF data is voluntary, there may be some discrepencies between the market values in the survey and MSCI ACWI.
Source: Vanguard, based on data from the IMF’s Coordinated Portfolio Investment Survey (2014), Barclays, Thomson Reuters Datastream, and FactSet.

Canada has a shallow equity market, representing essentially three sectors: Financials, Energy and Materials (as at writing, the sector breakdown of the S&P/TSX Composite Index is 33.5% Financials, 20.7% Energy and 11.9% Materials). Stock selection outside of those key sectors are very limited and subject to concentration issues, such as the big run-up in the last decade in stocks like RIM/Blackberry, and more recently, Valeant Pharmaceuticals.

Canada is facing a number of fundamental economic and performance challenges – including high real estate prices and low energy prices (approximately 50% of Canada’s exports are tied to energy). It’s an economy that continues to underperform due to depressed global commodity prices and increasing concerns over the sustainability of residential real estate prices.

In recent years, this massive home-country bias has been remedied through large allocations to U.S. equities. In fact, according to the International Monetary Fund’s Coordinated Portfolio Investment Survey (CPIS), 63% of Canadian investor allocations outside of Canada are to the United States. This implies that Canadians have a total equity allocation in the vicinity of 85% in Canadian and U.S. equities.

Expensive Valuations

U.S. equities have clearly been a great asset class in which to be invested, but unlike Canadian equities, have significant market depth for sector exposure. U.S. equities, however, are also currently extraordinarily expensive from a historical perspective. Going into 2017, U.S. and Canadian stocks were amongst the most expensive in the world, as determined by calculating the adjusted price-to-earnings ratio.


Source: ReSolve Asset Management. Data from Leuthold via Meb Faber

Worse still, both markets have seen their valuations rise even more year-to-date. The below table shows the performance of key global indices. Canadian and U.S. equities remain relatively expensive, particularly versus their counterparts in Europe and Emerging Markets. In the last three months, the global markets have seen a significant rotation towards the undervalued markets. For instance, MSCI EAFE ETF was the top-selling ETF in May of 2017, with approximately $4 billion in in-flows. (Source:

Total Return (CAD Equivalent) P/E Ratio P/B Ratio
1 Mo 3 Mo 6 Mo YTD 1 Yr 3 Yr 5 Yr
S&P/TSX Composite Total Return Index 0.44% 2.00% 6.87% 2.86% 14.92% 5.13% 8.06% 21.55 1.69
S&P 500® Index 3.69% 10.12% 15.42% 8.77% 28.21% 18.90% 21.28% 21.36 2.92
EURO STOXX 50® Index 7.06% 17.39% 18.70% 14.17% 25.51% 6.10% 15.67% 20.27 1.65
MSCI Emerging Markets Index 4.73% 12.63% 10.05% 15.13% 26.56% 7.00% 5.67% 15.70 1.51

Source: Bloomberg, as at April 28, 2017.

There are fundamental reasons for this rotation, beyond just the fact that these equities are cheaper on a relative valuation basis (although Europe has certainly become much more expensive). Part of the reason that the U.S. equity market has led most global equity markets over the last five years is due to the fact that it is the farthest along in its economic recovery. Stock markets are predictive pricing mechanisms, which move in advance of economic movement.

Economic data from China and Europe suggests that those economic zones which have been significant laggards seem to have finally turned a corner.


Source: Fiera Capital as at May 1, 2017.

Four ETFs Ideas to Enhance Global Exposure

The Horizons EURO STOXX 50® Index ETF (HXX): HXX provides indirect exposure to the EURO STOXX 50® Index, which is the benchmark blue-chip index for Europe. It includes the continent’s biggest companies, such as Sanofi, Bayer, Siemens, Unilever and Anheuser-Busch INBEV.

Overall, economic conditions are improving, whereas the current relative P/E on these stocks is generally much lower than many in North America. The EURO STOXX 50® Index includes massive multi-national companies that earn their revenue from around the world. Sector, rather than geography, is a much better predictor of returns (see chart: “Equity market home bias by country”), and generally correlations tend to be higher to sector than geography. To be able to get exposure to key European blue-chip stocks at a geographic discount, it should be a decent long-term relative return strategy – assuming you have a longer-term view on equities.

The Horizons China High Dividend ETF (HCN): HCN has delivered a 12.29% return for the three months ending May 31, 2017. Much of the resurgence in Emerging Markets is coming from a fundamental bounce-back in Chinese economic growth, which is ultimately the key driver of emerging market growth.

Hong Kong, as a sub-set of Chinese equity investing, is an interesting opportunity because it is benefitting from mainland interest due to the opening of Stock Connect programs that connect Hong Kong with the key mainland stock exchanges in Shanghai and Shenzhen. This opens up these stocks to the significant investor potential from mainland China investors who are looking to Hong Kong stocks as a source of diversification.

To give some context, the mainland CSI 300 Index is up about 2.85%, whereas the Hang Seng Composite is up about 14.4% (as at May 23, 2017). The currency exposure of Hong Kong, which is pegged to the U.S. dollar, has likely helped this, but there is a fundamental focus on Hong Kong stocks from which the market seems to benefitting.

1 Mo 3 Mo 6 Mo YTD 1 Yr 3 Yr 5 Yr 10 Yr 15 Yr Common
SIR* Inception
Horizons China
High Dividend
Yield Index ETF
-4.59% 3.63% 18.19% 18.19% 26.33% 15.20% 15.20% 11/01/2016
Hang Seng High
Dividend Yield
-0.31% 6.43% 21.76% 21.76% 29.29% 11.64% 26.12% 8.82% 10/12/2012
Hang Seng HSI
1.43% 8.51% 19.52% 19.52% 27.78% 7.39% 9.65% 5.26% 9.90% 24.14% 12.27% 02/01/1990

*The period from the inception date of the Horizons China High Dividend Yield Index ETF: January 11, 2016.
Source: Morningstar Direct as at June 30, 2017.
The indicated rates of returns in the table above are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends and distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Past performance is not a guarantee of future results.

The Horizons Global Managed Opportunities ETF (HGM): HGM has been one of our best-performing actively managed ETFs year-to-date, delivering a 4.00% return during the month of April alone. HGM is a global mandate that is highly diversified across both equity and fixed income ETFs. There has been a strong call on a global “reflationary” economic environment. The big movers in this strategy are the Emerging Market exposure, which HGM has had an overweight, through various ETF holdings.

The real appeal of this ETF is that it puts together a global strategy, with virtually no Canadian exposure, utilizing the sub-advisor’s extensive macro-economic expertise to select global equity and fixed income ETFs. Most Canadian investors have limited knowledge of the investment landscape outside of North America, so once an investor makes a call to diversify globally, HGM is a powerful one-stop solution to provide this exposure as a complement to existing North American holdings.

The Horizons Risk Parity ETF (HRA): When HRA launched last year, the sell-off in global bonds in the last quarter of 2016 really dragged on the performance of this ETF. Intrinsic to HRA’s strategy is an even allocation to risk. This means that it’s had meaningful weights to unloved asset classes and sectors, such as high weightings to bonds, European equities and Emerging Market stocks.

One of the added benefits of the HRA strategy is the built-in risk protection. If, for whatever reason, we see a correction in U.S. equities (something that becomes more likely every time the S&P 500 and NASDAQ-100 break through new record highs), it has a strong weighting to risk-off asset classes that should mitigate losses.

1 Mo 3 Mo 6 Mo YTD 1 Yr 3 Yr 5 Yr SIR*
Horizons Managed Global Opportunities ETF 4.00% 8.85% 6.59% 8.85% 15.08% 7.56%

*The period from the inception date of the Horizons Managed Global Opportunities ETF: August 25, 2015.
Source: Horizons ETFs, as at May 31, 2017.
The indicated rates of returns in the table above are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends and distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Past performance is not a guarantee of future results.

General Investment Objectives:

HXX: Seeks to replicate, to the extent possible, the performance of the EURO STOXX 50® Futures Roll Index (Total Return), net of expenses. The EURO STOXX 50® Futures Roll Index (Total Return) is designed to measure the performance of 50 of the largest companies that are sector leaders in the Eurozone.

HCN: Seeks to replicate, to the extent possible, the performance of the Hang Seng High Dividend Yield Index (the “Underlying Index”), net of expenses, by investing primarily in the underlying ETF. The Underlying Index is designed to measure the performance of Hong Kong-listed equity securities characterized by high dividend yield.

HGM: The investment objectives of HGM are to use flexible tactical asset allocation among multiple global asset classes to seek long term growth, while also seeking to protect against downside risk. HGM will invest primarily in exchange traded products that are listed on North American stock exchanges and may be exposed to equity securities, fixed-income securities or currencies around the world, or to gold.

HRA: Seeks long term capital appreciation through the use of asset allocation. Horizons HRA will primarily use exchange traded products to gain exposure to a portfolio of global asset classes with a focus on the forecasted amount of risk that each investment contributes.

The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. and Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

Certain statements may constitute a forward looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

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