Canadian Stocks Beat the S&P 500 Nearly 2-to-1 Last Year: Should You "Buy Canadian"?

American stocks make up under half of global market capitalization -- yet the typical U.S. investor has over 70% of their portfolio in U.S. stocks. This tendency to prefer domestic companies, called "home country bias," isn't unique to Americans, as people everywhere are more comfortable with what's familiar. But with the U.S. accounting for just 25% of the global economy, giving in to home country bias can mean missing out on great opportunities.

Last year, for instance, international equities outperformed the U.S. market -- and America's northern neighbor in particular is shining. The S&P/TSX Composite Index, Canada's equity benchmark, rose 28.3% last year, compared to the S&P 500's 16.4% gain.

The 12-percentage-point beat marks the first time since 2016 that the Toronto gauge has beaten the S&P 500 in a bull market, and some analysts expect the outperformance to keep up through 2026.

Image source: Getty Images.

Why Canadian stocks are having a moment

For the last three months, U.S. tech stocks have been essentially flat, as fears took hold that the white-hot rally in artificial intelligence (AI) stocks was rising into bubble territory. Since early November, the tech-heavy Nasdaq Composite has stayed essentially flat, rising just 0.4%.

Canada's market doesn't have overvaluation fears weighing it down. While tech stocks make up a third of the S&P 500's value, tech is only the Canadian market's fifth-biggest sector. Tech makes up just 10% of the TSX Composite, which is heavier in banking and natural resource stocks.

Financial firms are benefiting from falling interest rates, which at 2.3% are much lower than the 3.5% to 3.75% range the Federal Reserve opted for in its January meeting. This could change on April 29, the next time Fed officials are scheduled to announce a potential move on rates, but traders only see a 1.6% chance that the Fed goes as low as the 3% to 3.25%--which would still be far above Canada's interest rates.

Then there is the fact that Prime Minister Mark Carney has responded to the trade war started by U.S. President Donald Trump with a sweeping economic plan to make Canada less reliant on America by overhauling infrastructure, sidestepping bureaucracy to tap into Canada's immense natural resources, and beefing up its defense industry. Carney's ramped-up domestic spending has goosed Canadian defense and infrastructure stocks, with the aerospace stock Bombardier (TSX: BBD.A) more than doubling in a few months in 2025, while the uranium firm Cameco (NYSE: CCJ) surged over 50% on Carney's plans to expand nuclear power.

As if that weren't enough, Canadian stocks are still cheap relative to their U.S. counterparts. The TSX composite's average price-to-earnings ratio is just 20, compared to 29.5 for the S&P 500.

The best way to play Canadian stocks

With the Canadian market's rally being so broad-based, a diversified, "catch-all" play could be the best way to tap into remaining upside.

The iShares MSCI Canada ETF (NYSEMKT: EWC) is an exchange-traded fund that seeks to track the investment results of an index composed of Canadian equities. In 2025, it handily beat even the TSX Composite, returning 36%.

Over the last five years, it's achieved average annual returns of 14.12%, while its expense ratio of 0.50% is reasonable given not just this performance, but the access it provides to 84 Canadian stocks that are undervalued compared to the S&P 500.

For investors seeking a simple and diversified way to play Canadian stocks' outperformance, this fund is a buy.

William Dahl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cameco. The Motley Fool has a disclosure policy.