Investing has some universality to it, right? From Afghanistan to Zimbabwe, the human propensity for deferring today's consumption to build tomorrow's fortune should be largely the same. Of course, the real world is more complicated than that. In some nations, such as Japan in the 1980s, citizens saved so much of their income that the government actually encouraged them to spend more profligately. In other countries populations employed mostly in subsistence agriculture barely have the means to save. However, what if we were to compare two similar, developed, charter members of the First World–two countries that share a language, much of the same culture, and a 5,525-mile border?
- Canadian markets such as the TSX Venture Exchange list many small companies whereby it's a venture capital market place.
- U.S. markets are larger and more liquid with more sectors and companies for investors.
- Canadian banking and healthcare industries are stable, whereby the top five banks hold 85% of the country's banking assets.
Neighbors to the North
Canadians' doubtless objections notwithstanding, their nation and the United States are more similar than different. Our institutions are mostly trustworthy and secure, at least compared to most of the rest of the world, and both countries rank in the top twenty in the Heritage Foundation's 2020 Index of Economic Freedom.
Does it, therefore, follow that individual investing is similar on either side of the 49th parallel? The national stereotype is that Canadians are reticent, even deferential, while their southern neighbors are cocksure and bold. By extension, Canada should be a land of government debenture holders while Americans put all their money in Internet startups and wind farms. Nevertheless, that doesn't explain why Canada, and not the U.S., is home to some of the wildest and most speculative stock trading per capita in the Western world.
Canadian Financial Markets
The TSX Venture Exchange (TSXV) is a venture capital market place, headquartered in Calgary with offices in Toronto, Vancouver, and Montreal. In other words, the exchange provides access to capital to venture companies while simultaneously protecting investors. The exchange belongs to its parent TMX group, as does the Toronto Stock Exchange, where the most senior equities are traded. The TSX Venture Exchange contains small Canadian stocks with more than 1,600 companies listed. The TSXV bills itself as the nation's "junior listings market," which is to say that almost all of the companies whose stock trades on it are longer on dreams than on solid financials.
The exchange and more specifically its antecedents have hosted some notorious cases of stock fraud. The classic example is Bre-X, a gold mining concern that in the mid-90s went from penny stock to $6 billion market cap (and $287 share price) in a matter of months. The company's gold samples were fraudulent, but the insider trading was very much real. While such improprieties are rarer today, penny stocks are cumulatively a major part of the Canadian securities industry.
In the U.S., such below-investment-grade issues are nowhere near as prevalent. However, nearly 400 companies of the TSX Venture Exchange are included in the S&P/TSX Venture Composite Index. Over half of the companies listed in the index are basic materials stocks, such as mining and energy companies.
U.S. Financial Markets
The U.S. boasts the largest and most stable market with the New York Stock Exchange, which is the largest exchange in the world. The liquidity, meaning shares can be bought and sold freely, provides investors with more choices of stocks and securities with a large number of sectors.
Canadian investors can gain access to international companies within the U.S. that generate most of their revenue from overseas. Companies like McDonald's Corporation (MCD) and Proctor and Gamble Company (PG) are typically considered reliable, stable companies that have steady earnings and consistent dividend payouts. Dividends are cash rewards that companies pay to their shareholders for investing in their company.
Both countries are oil exporters, although the energy sector comprises of a larger share of the Canadian financial markets than in the U.S. However, the U.S. is now one of the largest oil producers in the world. For investors looking to diversify, the U.S. boasts more sectors and companies within various industries. Canada offers plenty of choices for those looking to buy into mining and energy stocks. However, the country's healthcare and banking sectors not only have government backing but typically offer very attractive dividends.
The U.S. has been traditionally regarded as the world's beacon of economic freedom with its relatively free, lightly regulated market in consumer goods and services. The U.S. free-market system should make for easy exchange and a concomitant rise in per capita income–that, and a competitive banking system with plenty of market players. Whether the assumptions are true or not, the contrast in banking systems is one of the biggest economic differences between the two countries.
Assets are, to put it bluntly, concentrated in the hands of a few in Canada. A very few. Canada issues a sparse number of bank charters, meaning that the "big five" banks dominate lending and depositing. Canada's five largest banks are as follows:
- Royal Bank of Canada (RY)
- Toronto Dominion Bank or TD Bank (TD)
- Scotiabank (BNS)
- Canadian Imperial Bank of Commerce (CIBC)
- Bank of Montreal (BMO)
Canada's big five controls the vast majority of the country's domestic banking assets–nearly 85%–with only a handful of smaller alternatives. However, the dividend yield paid by Canada's top five banks is typically from 3% to 5%, which is 1% to 2% higher than most U.S. banks.
The top five U.S. banks manage approximately 50% of all assets held in banks in America, leaving many other financial institutions slicing off pieces of the market. The five largest banks in the U.S. are as follows:
- JPMorgan Chase & Co. (JPM)
- Bank of America Corporation (BAC)
- Citigroup Inc. (C)
- Wells Fargo & Co. (WFC)
- Goldman Sachs Group Inc. (GS)
The practical difference is that American investors have far more choices when shopping for loans. Granted, the sheer number of American banks means that bank failures are a somewhat regular occurrence, but for some consumers, that's a tradeoff for not having an oligopoly in charge of the industry.
However, the counter-argument can be made for stability over options, as the World Economic Forum has cited Canada's banking system as being the soundest in the world. Two small Canadian regional banks folded in the 1980s, and they remain the only banking failures in the country in the last 88 years. "Too big to fail," indeed.
As for similarities, according to the Organization for Economic Cooperation and Development, which operates under the aegis of the United Nations, Canada's household savings rate of 3% is lower to the 8% savings rate in the U.S.
The Bottom Line
Among citizens of the world's richest countries, which Canada and the U.S. both qualify to be included–differences in investing strategy typically come down to net worth and income. A 30-year-old Canadian with 2.3 kids and an annual salary of $50,000 isn't going to have an investment portfolio similar to that of a 60-year-old Canadian with an empty nest and a $5 million war chest. Rather, that 30-year-old Canadian is going to have an investment portfolio similar to that of a 30-year-old American with 2.3 kids and a $50,000 annual salary. Again, when controlling for age, life station, and similar variables, American and Canadian investors have more in common than not.