Emerging Markets and International Diversification: What Every Canadian Investor Should Know

Canada: A Small and Concentrated Market

The S&P/TSX Composite — Canada's main stock index — is heavily weighted toward two sectors: financials (banks, insurers, wealth managers) and energy (oil, natural gas, pipelines). Together, these two sectors routinely account for more than 50% of the index. That means a drop in crude oil prices or a rise in loan defaults can drag down your entire Canadian portfolio. By contrast, US, European, and Asian markets offer broad exposure to technology, healthcare, consumer goods, and clean energy — sectors that are nearly absent from the TSX.

The Case for International Diversification

International diversification reduces concentration risk by spreading your investments across economies that often move independently of one another. When Canada faces a commodity-driven downturn, Asian or European markets may be performing differently. Here are the two main building blocks:

• Developed markets (e.g., United States, eurozone, Japan, Australia) — Stable economies, strong corporate governance, and high liquidity. They typically make up 80–90% of a globally weighted equity portfolio.
• Emerging markets (e.g., China, India, Brazil, Mexico, South Korea, Taiwan) — Faster GDP growth and an expanding middle class, but also higher political risk, currency volatility, and regulatory uncertainty.

Holding both categories gives you participation in global economic growth rather than a bet on Canada's commodity cycle alone.

Emerging Markets: Higher Growth, Higher Risk

Emerging markets (EM) are countries whose economies are still developing but whose growth rates often outpace those of wealthier nations. India has been one of the world's fastest-growing major economies for several consecutive years. China remains the world's second-largest economy by nominal GDP. Collectively, emerging-market countries account for more than 40% of global economic output (source: World Bank), yet only about 11–12% of global stock market capitalization — a gap that reflects both their underrepresentation in public markets and their long-term catch-up potential.

That said, investing in EM comes with distinct risks:

• Political risk — sudden regulatory shifts, expropriation, or geopolitical tensions (e.g., China's 2021 crackdown on its tech sector).
• Currency volatility — local currencies can depreciate sharply against the Canadian dollar.
• Lower liquidity — some EM exchanges are less liquid and harder to trade than North American markets.

These risks don't mean you should avoid EM entirely, but they do mean you should size your allocation carefully and maintain a long time horizon.

How Much Emerging-Market Exposure Is Typical?

A market-cap-weighted global equity portfolio typically allocates around 10–13% to emerging markets. That's roughly the weighting you'll find in an all-in-one ETF like XEQT vs VEQT vs VFV. For example, XEQT (iShares Core Equity ETF Portfolio) holds hundreds of emerging-market companies through its underlying exposure to the MSCI Emerging Markets Index. VEQT (Vanguard All-Equity ETF Portfolio) does the same. These funds automatically rebalance across regions, so you don't need to manage multiple ETFs separately.

If you want a deliberate overweight to EM — because you have a strong conviction in their long-term potential — you can add a dedicated ETF such as XEC (iShares MSCI Emerging Markets ETF) or VEE (Vanguard FTSE Emerging Markets All Cap Index ETF) alongside your core holdings.

How to Get International Exposure Simply

There are two main approaches for Canadian investors:

• All-in-one ETFs (XEQT, VEQT) — A single fund holds thousands of global equities (Canada, US, international developed markets, and emerging markets) in market-cap-weighted proportions. This is the simplest option and works well inside an RRSP, TFSA, or RESP.
• Multi-ETF approach — You combine, for example, a Canadian ETF (XIU), a US ETF (XUU or VFV), an international developed ETF (XEF or VIU), and an emerging-markets ETF (XEC or VEE). This requires more active management but gives you precise control over your regional weights.

Either way, the goal is the same: stop letting your portfolio's fate hinge almost entirely on Canadian financials and energy. Geographic diversification doesn't eliminate risk — it spreads it more intelligently across the global economy, so no single country's bad decade has to become yours.

Frequently asked questions