Buying Canadian Stocks Still a Foreign Experience for U.S. Investors

VANCOUVER -- For many Americans, investing in Canadian equities is a little like traveling north of the 49th parallel: It's the subtle changes, not the glaring differences, that make us homesick. Tim Hortons versus Dunkin' Donuts; the loonie versus the greenback; kilometers versus miles; and Lynyrd Skynyrd versus Leonard Cohen.

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In addition, U.S. investors have had to contend with an ever-fluctuating (though currently favorable) exchange rate, brokers who may be reluctant to place Canadian trades and ongoing concerns about credibility. This is especially so for companies listed on the high-flying Canadian Venture Exchange.

Those concerns, however, are more than compensated for by recent gains north of the border. The CDNX Composite, the benchmark for the Canadian Venture Exchange, is up an impressive 62% since Jan. 1, while the Nasdaq Composite is off 7.4% during the same period. The TSE 300, the benchmark index for the Toronto Stock Exchange, is up more than 30% from a year ago, versus a 7% gain for the Dow Jones Industrial Average in the comparable period.

"There's a perception of value," says Douglas Taylor, founder of Seattle based Taylor Group, an American discount brokerage firm specializing in Canadian equities. "Canada has the smaller caps, the natural resource stocks that we don't have, and it has an aura of being able to make the big hit. There's a lot down here, but there's a lot up there too."

A quick and easy approach to investing in larger Canadian companies is via their listings on the Nasdaq or the New York Stock Exchange, as well as through American depositary receipts of Canadian companies. ADRs enable investors to trade foreign stocks as if they were issued by U.S. companies. Some of the better known outfits include Petro-Canada (PCZ Quote), Intrawest (IDR Quote) and Canadian National Railway (CNI Quote).

Another solid vehicle for investing in Canadian stocks is through mutual funds. The (FICDX Quote)Fidelity Canada fund, for example, is heavily weighted in northern big-cap issues such as Nortel Networks (NT Quote) and Toronto-Dominion Bank (TD Quote). (Fidelity levies a 3% sales charge on shares of this fund.)

Several global funds also provide access to the Canadian markets. The (PNGAX Quote)Putnam International Growth fund, which is sold primarily through brokers, counts BCE (BCE Quote) among its top-five holdings. (You'll have to pay a 5.75% sales charge to buy shares of this fund.)

A hurdle for the more adventurous American investor is the process of actually placing orders on one of Canada's stock exchanges. Never mind that the U.S. and Canada are next-door neighbors. A number of factors -- from securities laws to higher costs -- make the process cumbersome, if not aggravating.

"Most American brokers shy away from selling Canadian securities because of the bureaucracy involved," says Marco den Ouden, Web site guide for About.com's Investing: Canada section. "Some of the larger firms and some specialty firms do handle them."

One such company is Ameritrade (AMTD Quote). Similar to many of the larger U.S. brokerages, the firm subjects Canadian transactions to a different commission schedule than American transactions. In Ameritrade's case, commissions for online orders for Canadian stocks range from $48 to $168, compared to $8 for American stocks.

At Charles Schwab, the fee schedule for Canadian trades is significantly lower. According to Steve Chandler, director of Schwab's Global Investing Services, commissions for online orders for Canadian stocks range from $29.95 to a maximum of $55 (versus $29.95 for American stocks).

"We see a greater move into the Canadian securities when the price of gold rises," says Chandler. "But the attraction for Canada is similar to Hong Kong and London: clients who want to diversify their portfolio."

Still, there's an ongoing perception among Americans that the Canadian markets are havens for stock manipulations and fly-by-night companies. That stigma is largely the byproduct of the Vancouver Stock Exchange's scam-riddled mining stock heyday, as well as the Bre-X stock swindle, which fleeced investors worldwide. The company's host exchanges, the TSE and the Alberta Stock Exchange, as well as the mining industry in general, suffered a collective black eye.

Wisely, the Vancouver and Alberta exchanges have since amalgamated into the CDNX. According to the exchange's President and CEO Bill Hess, the CDNX actually has a higher standard of regulation, compared to some of its junior market counterparts.

"We tell people that it's a country to be considered," says Taylor. "There are a lot of wonderful companies -- take BCE and Nortel -- that are doing very well, and they'll match up with anything down here. And there are a lot of Canadian companies that do the bulk of their business in the United States."

For investors with a hankering for some American-style foreign exposure, Canada may offer the best of both worlds. But, just as traveling abroad requires a certain protocol, so does investing in the Great White North: Be kind to the locals, keep an eye out for scam artists, and never underestimate the popularity of the American dollar. (For a look at some promising emerging Canadian technology companies, see John Rubino's Stock Strategies columns of Feb. 4 and Feb. 18 on this site.)