Balance Your TFSA: A Top Strategic Canadian ETF to Own

A lot of Canadian investors have what’s called a home country bias inside their Tax-Free Savings Account (TFSA).

While Canadian stocks represent only about 3% of the global stock market, it’s not unusual to see Canadians with 25%, 50%, or even 100% of their portfolios invested domestically.

There are practical reasons for this beyond simple familiarity, which we’ll get into. But there’s also a flip side. Concentrating too heavily in one country can expose you to deeper drawdowns when that market underperforms.

If you’re looking to balance your TFSA more strategically, there’s one exchange-traded fund (ETF) that can complement a Canadian-heavy portfolio without overlapping it.

Understanding home country bias

Home country bias refers to the tendency for investors to overweight stocks from their own country relative to the global market. Canadians do this for several logical reasons.

First, currency risk. When you buy U.S. or international stocks, you introduce foreign exchange exposure.

If the Canadian dollar strengthens against the U.S. dollar, your foreign holdings can lose value even if the underlying stocks perform well. If the Canadian dollar weakens, it can boost returns.

Over long periods, currency fluctuations tend to balance out, but in the short term, they can add volatility that has nothing to do with company fundamentals.

Second, taxes. Many Canadian investors don’t realize that U.S. dividends face a 15% foreign withholding tax, even inside a TFSA.

That tax is deducted at source and cannot be recovered in this account. Canadian dividends, by contrast, are not subject to foreign withholding, and in taxable accounts they benefit from the dividend tax credit.

Third, currency conversion costs. Buying U.S.-listed stocks or ETFs often requires converting Canadian dollars into U.S. dollars.

While brokerages have become more competitive, there is still friction in the process in the form of potential fees and spreads. Holding Canadian securities eliminates that extra step.

There’s also a less obvious layer. Your income is likely earned in Canadian dollars. If you own a home, that’s a real asset located in Canada. Even your job prospects are tied to the Canadian economy.

When you add it all up, many investors are already heavily exposed to Canada before they even look at their investment portfolio. Loading up further on Canadian stocks can amplify that concentration without you realizing it.

For all these reasons, a home country bias is understandable. But going too far can leave you underexposed to global growth.

How to complement Canadian stocks

If you already hold a substantial amount of Canadian equities, the cleanest way to diversify is to add something with zero overlap. One strong candidate is the Vanguard FTSE Global All Cap ex Canada Index ETF (TSX:VXC).

It’s a mouthful, but the strategy is straightforward. VXC holds thousands of stocks across international developed and emerging markets around the world, excluding Canada. That means no duplication with your domestic holdings.

This structure allows you to dial in your desired Canada-versus-rest-of-world allocation. Want 40% Canada and 60% global? You can achieve that simply by adjusting your mix of Canadian ETFs and VXC.

In classic Vanguard fashion, it’s cost-efficient, with a management expense ratio of just 0.22%. For broad global equity diversification, that’s a very reasonable price to pay.

The post Balance Your TFSA: A Top Strategic Canadian ETF to Own appeared first on The Motley Fool Canada.

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More reading

• TFSA Investors: My Game Plan for 2026
• The 2 ETFs I’d Buy With $1,000 and Hold Forever

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.