How to Invest in Canada
A complete guide to buy US stocks in Canada
Learn why and how to invest in US stocks in Canada. — 4-minute read.
For most Canadians, the domestic stock market is a great starting point for investing. The Toronto Stock Exchange (TSX) offers a variety of high-quality, blue-chip stocks, providing substantial gains and income for many investors.
However, the Canadian market is relatively small, making up only 3% of the world's market capitalization. This is why diversifying by investing in international stocks, including those in the US, can be beneficial.
Diversifying your portfolio by investing in different markets helps spread risk, much like not putting all your eggs in one basket.
In this guide, we will explore the benefits, methods, and risks of buying US stocks for beginner investors in Canada.
1. The US vs. Canadian stock markets
Investing in the US stock market offers compelling benefits for Canadians. In this section, we will explore the scale of the US market, its industry segmentation, and the potential for dividend distribution.
- Market scale
Investing in US stocks from Canada is advantageous due to the significantly larger scale and higher earnings of the US market.
The US stock market, with a market capitalization of approximately $46.2 trillion in 2023, far exceeds Canada's $2.7 trillion market cap. This vast size translates to higher trading volumes, with the US market recording trillions in daily trades compared to much lower figures in Canada.
On the earnings level, consider the most representative indices of the two markets as an example. The return of the S&P 500 index was 10.48% as of April 30, 2024, significantly higher than the 4.68% for Canada's S&P/TSX Composite index for the same period. This indicates superior overall earnings power for US-listed companies.
The data above clearly shows that US stocks are more actively traded, providing better liquidity and potentially more investment opportunities.
- Industry segmentation
Investing in US stocks offers Canadian investors notable advantages due to differences in market composition.
Let's compare the most representative indices of the two markets (S&P 500 Index and S&P/TSX Composite Indices) as an example. The bar chart illustrated below as of 2023.
The US market has a high concentration in technology and healthcare, sectors known for rapid growth and innovation, weighing 27.4% and 14.1%, respectively.
In contrast, the Canadian market is dominated by its two largest, slower-growing sectors: 28.7% in financials and 15.7% in materials.
By investing in US stocks, Canadians can gain access to high-growth industries, enhancing their portfolio diversification and potential returns. Additionally, exposure to the US market can provide stability and balance against the more resource-dependent Canadian market.
- Dividend distribution
Investing in US stocks while residing in Canada offers several advantages, particularly in terms of dividend distribution.
While Canadian stocks generally offer higher dividend yields, the overall return on investment tends to be higher for US stocks due to their significant capital appreciation. For example, from 2000 to 2024, the US market experienced a percentage change of 264.53%, compared to Canada's 172.12%. This results in an average annual return of 5.54% for the US market and 4.26% for Canada's market.
As previously mentioned, US stocks provide exposure to a broader range of industries, especially high-growth sectors like technology and healthcare, which are less dominant in the Canadian market. This diversity can lead to more consistent dividend payouts, as companies in these sectors often have robust cash flows and a strong commitment to returning value to shareholders.
2. How to buy US stocks in Canada
2.1 Open an account and fund it
To start investing in US stocks from Canada, the first step is to open a trading account with a broker. Moomoo is an excellent choice, offering low transaction fees, free real-time stock quotes, and level 2 market data.
Next, you might wonder which account to use: TFSA or RRSP? Here's why an RRSP is often the better option for Canadians investing in US stocks:
Tax-Deferred Growth: Investment earnings in an RRSP can grow tax-deferred until withdrawal at retirement, allowing for greater compounding. US stocks can significantly boost your investment returns and offer greater tax benefits.
Tax-Deductible Contributions: RRSP contributions reduce your current taxable income, offering immediate tax savings.
Currency Flexibility: RRSPs allow you to hold US dollar assets directly, avoiding currency conversion fees when trading US stocks.
Withholding Tax Exemption: An RRSP exempts you from the typical 15% withholding tax on dividends earned from US stocks.
In contrast, a TFSA has lower annual contribution limits and contributions are not tax-deductible. Therefore, for long-term retirement investing, an RRSP provides optimal tax-advantaged growth opportunities.
>>Learn more about RRSP & TFSA? Check the link below:
An Overview of the RRSP Account for New Canadian Investors
An Overview of the TFSA Account for New Canadian Investors
Advanced Strategy: How to Maximize Your TFSA Benefits in 2024?
2.2 Convert CAD to USD
The next step is to convert your CAD to USD in your account through the brokerage.
Investing in US stocks with CDRs
In addition to converting CAD to USD, there's another way to invest in the U.S. stock market using CAD directly: Canadian Depository Receipts (CDRs).
CIBC and the NEO Exchange have introduced Canadian Depository Receipts (CDRs), which represent shares in U.S. companies but trade in CAD. For example, you can buy and sell an AAPL CDR using CAD, avoiding the hassle and cost of currency conversion required for AAPL stock in USD.
Currently, the NEO Exchange offers 23 popular, large-cap, blue-chip U.S. stocks as CDRs.
However, keep in mind that CDRs carry the same risks as owning stocks: if the value of the underlying stock falls, the value of the CDR will also decrease.
2.3 Buy US stocks
With the above two steps, you can start investing in US stocks on moomoo!
3. Risks of trading US stocks in Canada
Foreign Exchange Risk
One of the primary risks of trading U.S. stocks is foreign exchange risk. Fluctuations in the exchange rate between the Canadian dollar (CAD) and the U.S. dollar (USD) can impact your investment returns. If CAD strengthens against the USD, your US stock holdings will be worth less in CAD terms, and vice versa.
Political and Economic Risks
Investing in US stocks also exposes you to the political and economic risks specific to the United States, which may differ from those in Canada.
