Objectively speaking, the Canadian economy isn’t in great shape right now. High food and rent costs, stagnant wages, immigration challenges, the threat of tariffs, and falling GDP per capita all point to trouble.
But here’s the thing: the economy is not the stock market. It’s a common misconception. There have been plenty of times when the economy was booming, but the market struggled, and vice versa.
Despite the challenges, there are a few key reasons why I believe the average Canadian should invest domestically. Here’s a look at why—and an exchange-traded fund (ETF) that makes it easy.
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Valuations are lower
Nobody likes overpaying for anything, and stocks shouldn’t be any different.
You can measure how much you’re paying for a stock using forward price to earnings (P/E). This metric compares a company’s current stock price to its expected earnings over the next 12 months.
Essentially, it tells you how many dollars you’re paying today for every dollar a company is projected to earn in the future.
Right now, U.S. stocks—represented by the S&P 500—trade at a 28.98 forward P/E, meaning investors are paying nearly $29 for every $1 of future earnings. Meanwhile, Canadian stocks—measured by the S&P/TSX 60—trade at a much lower 20.91 forward P/E.
Right off the bat, Canada is cheaper. Yes, U.S. stocks tend to have higher earnings growth, but it’s not uniform. Take away the Magnificent Seven, and growth across the rest of the S&P 500 is pretty lacklustre.
If you prefer to buy low and sell high, then at today’s valuations, I’d rather overweight Canadian stocks.
Yields are higher and more tax-efficient
I’m a total return investor, but I get it—some of you love high yields, and if that’s the case, Canadian stocks win easily.
Right now, the S&P/TSX 60 has a 12-month trailing yield of 2.84%. This metric measures the total dividends paid over the past year as a percentage of the index’s current price. In contrast, the S&P 500 offers just 1.3%—less than half.
But it’s not just about the yield itself—Canadian dividends are also more tax-efficient. In a non-registered account, you benefit from the eligible Canadian dividend tax credit, which “grosses up” dividends on your tax return before applying a lower tax rate than regular income.
A little-known fact about U.S. dividends is that 15% is withheld at the source, even if you hold them in a Tax-Free Savings Account (TFSA)—which is supposed to be tax-free.
Only a Registered Retirement Savings Plan (RRSP) is exempt from this withholding tax. With Canadian stocks, there’s no such concern.
What to invest in
If you agree with my points above, you can express this view cheaply and simply by buying BMO S&P/TSX 60 Index ETF (TSX:ZIU).
This ETF tracks the S&P/TSX 60 Index, which I mentioned earlier as the benchmark for blue-chip Canadian stocks. It gives you instant exposure to Canada’s largest and most stable companies in one ticker.
Right now, ZIU pays a 2.66% annualized distribution yield—which is not the same as the 12-month trailing yield mentioned earlier.
This yield is calculated by taking the most recent distribution, annualizing it, and then dividing it by the current share price. It’s a forward-looking estimate rather than a historical measure.
All this comes at a low cost, with a 0.15% management expense ratio—meaning for a $10,000 investment, you’d pay just $15 per year in fees.
