The iShares MSCI Canada ETF (EWC) rose 0.6% Monday as Canadian Prime Minister Justin Trudeau announced at a press conference his resignation after nearly a decade in office, citing the need for new leadership amid political challenges.
Trudeau, who is in his third term as prime minister, said while answering questions after the speech in Ottawa it was time for a “fresh start in parliament” in order for the country to navigate “complex” times domestically and internationally.
He added the transition will consist of two parts—the pausing of parliament until late March and his ultimate resignation which, Trudeau believes, will “decrease the level of polarization” in politics.
Trudeau’s challenges to remain in power escalated in December when his long-time ally Chrystia Freeland suddenly resigned as Canada’s finance minister and deputy prime minister. Freeland and former central banker Mark Carney are among the potential successors considered.
Comparing the largest Canada ETFs like EWC and the JPMorgan BetaBuilders Canada ETF (BBCA) to the largest U.S. equity ETF, the SPDR S&P 500 ETF Trust (SPY), the performance of U.S. stocks (13% annualized) is more than double that of Canadian stocks (5.8%) for the past decade.
Canadian stocks have historically lagged U.S. stocks due to several structural and economic factors:
The Canadian stock market is heavily weighted toward natural resources, such as energy and mining, and financials, which can limit growth potential compared to the more diverse and innovation-driven U.S. market. The U.S. market benefits significantly from technology, healthcare, and consumer discretionary sectors, which have been among the highest-performing industries in recent decades.
The U.S. market is home to many of the world’s largest and most innovative companies, particularly in the technology sector (e.g., Apple Inc., Microsoft Corp., and Amazon.com Inc.). Canada lacks a similar breadth of large-cap, high-growth companies, which has constrained overall market returns.
The Canadian market is smaller and less liquid than the U.S. market, which can make it less attractive to global investors. Additionally, the smaller pool of domestic companies reduces diversification opportunities.
The Canadian dollar’s relative weakness against the U.S. dollar over extended periods has further contributed to the underperformance of Canadian stocks for international investors.
The U.S. leads globally in venture capital funding and fostering startups, particularly in sectors like technology and biotechnology. Canada’s venture capital ecosystem, while growing, is comparatively underdeveloped.
The U.S. market is seen as a global benchmark, attracting significant foreign investment. This status creates a virtuous cycle of liquidity and valuation growth not as pronounced in Canada.
While Canadian stocks have offered strong performance in specific sectors and periods, highlighted most recently by a respectable 14% gain for broad market Canada ETFs like EWC in 2024, these structural factors explain why they have generally trailed the U.S. market over the long term. SPY gained nearly 25% last year.
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