When people first make the switch to DIY investing from high-cost mutual funds, there is usually a bias towards industries and companies that they know and are familiar with.
A home bias is when an investor spends heavily in domestic companies and less in other (international) markets. This can result in higher risk and much less diversity within the portfolio.
The tendency seems even greater for younger generations. A survey from Scotiabank showed that only 16% of Gen Y investors (ages 18 to 34) invested outside of Canada compared to 28% for the rest of us.
Are they missing out? Considering Canadian public companies account for less than 3% of all publicly listed companies in the world – the obvious answer is yes.
Why Home Bias Exists
Home bias differs between each investor and there are lots of reasons why it may exist.
- Familiarity. People tend to invest in companies that they know and love. I personally know heavy coffee drinkers who also invest heavily in Tim Hortons. Having a familiarity makes it easier to take the plunge and buy shares in the company.
- Knowledge. Many people are aware of media reports within their own country but fail to look to international media to learn more about foreign companies. Some investors lack the knowledge they need to comfortably invest in foreign companies so they tend to avoid them.
- Taxes. Most investors have some basic knowledge of how their Canadian investments are taxed and they know that Canadian dividends are given favorable tax treatment. But what about the taxes on foreign investments? It can get complicated and difficult to find the answers, which is another reason people tend to invest in domestic companies.
I am no different from other investors in that I have hometown bias too; I tend to look at investing in companies I know and am familiar with first.
How to Avoid Home Bias
The most straightforward way to invest in international markets is to do the research – looking into the countries, tax treatments, public companies and industries that are growing.
That sounds ideal, but who has all day to do hours and hours of research?
I definitely don’t have the time (or motivation) to do that much research so I plan to invest in exchange traded funds (ETFs).
There are lots of ETFs out there that can give an investor the exposure they need to international (and emerging) markets.
The costs are low, the holdings are diversified and they require significantly less research than investing in individual companies.
Here are a few ETFs with significant international exposure worth checking out:
- iShares Global Monthly Dividend Index (CYH). This fund is weighted towards Australia, U.S. and Taiwan and top holdings include Lockheed Martin, Chevron and Philip Morris. The focus is on quality dividend stocks in emerging and developed markets. The fund has increased 33% in the past 6 years and also currently yields 3.5%.
- Horizons Active Global Dividend (HAZ). This fund focuses mainly on the U.S. market with top holdings of SK Telecom, Reynolds American and JP Morgan Chase. The MER (management expense ratio) is a bit high for an ETF at 0.94% as the fund is actively managed.
- iShares MSCI EAFE Index Fund (XIN). This fund is very popular for domestic investors looking for international exposure. The investments focus on Japan, U.K. and France. The MER of 0.5% is reasonable and most of the holdings are in financials and industrials.
- iShares International Fundamental Index. This fund is weighted towards Japan, Canada and France with top holdings of Toyota, Nestle and Mitsubishi. The fund has increased 33% in the past 3 years.
Conclusion: home bias is common for many investors. Luckily, it can be easily addressed by picking up some low-cost ETFs with international exposure. They’re free to buy using most discount brokers and can give investors the exposure to international markets – without doing months of research needed to buy individual stocks.
How do you avoid home bias as an investor?
Related: 4 Reasons I Like ETFs