There are many reasons and potential benefits of diversifying globally, including broadening the exposure to sectors and companies that are underrepresented in the Canadian market, and to get exposure to the potential growth in other markets at times when Canadian markets may be experiencing slower or negative growth. Because different markets perform differently at different times, the correlation between global markets is typically less than similar securities within any single market.
With the globalization of economies, the correlation between global stock markets has increased over the years, but adding global exposure to a portfolio may in fact still result in improved risk-adjusted returns over longer periods.
Regarding broadening sector exposure, it's important to understand that Canada is a small investment market, and although we have some world-class companies, our broader market is heavily dominated by companies in the financial, energy and commodities sectors. The Canadian market doesn't provide very broad and diverse exposure to sectors such as health care, consumer-oriented companies, telecom and technology. Globally diversifying your portfolio allows you to get access to some of the best companies around the world in more broad sectors.
It is important for investors to understand the risks of the markets they are investing in when adding global allocations to their portfolio. A complete list of the risks can be found in each ETF's prospectus.
