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Think U.S. tech stocks are hot? Take a look at their Canadian counterparts

Jessy Bains
·3 min read

U.S. technology stocks have made big headlines among investors, but Canadian tech stocks deserve more love because as a group they’ve quietly outperformed their cross-border counterparts.

Even after a bumpy week the ETF IYW — a basket of familiar U.S. tech stocks including Apple, Microsoft, Facebook, and Alphabet has been on quite a run. It’s up 185 per cent over the last five years and 41 per cent year-over-year. The Canadian version, XIT, is up 219 per cent over the last five years and 46 per cent-year-over.

XIT versus IYW
XIT versus IYW

“There are a lot of great Canadian tech names that Canadian investors barely hear about. Of course, recent performance is forcing investors to take a closer look at these names,” Ryan Modesto, CEO at 5i Research, told Yahoo Finance Canada.

“The outperformance in XIT is in part due to the Canadian tech space doing quite well but also largely due to its structure, in which nearly 25 per cent of the ETF owns Shopify, which is up roughly 180 per cent this year and over 560 per cent over the last two years, now being the largest company in the TSX 300.”

The Shopify effect

Shopify and Constellation Software collectively account for nearly half of XIT and it contains only 14 other stocks compared to 162 for IYW. Tech also has a much lower weighting on the TSX (less than 10 per cent) compared to the S&P 500 (more than 27 per cent), which is a blessing and a curse for the benchmarks depending on how tech stocks are performing.

“The sector is thin in Canada but it houses some great companies that we like such as Constellation Software, Kinaxis, Descartes and Lightspeed POS,” said Modesto.

“Most of which have either high growth rates, high margins, or have proven to be able to consistently generate shareholder returns over time.”

Shopify and Constellation Software’s runs could continue. National Bank Financial markets has an outperform rating on Shopify, expecting upside potential particularly over the longer term. Constellation Software is a sector perform which means less upside relative to Shopify. But if they falter, some of the other stocks will need to pick up the slack to maintain the outperformance.

“History may not necessarily be repeating, but 30 per cent of XIT’s portfolio is now Shopify, which alone delivered 139 per cent return year-to-date. This one company therefore contributed 35 percentage points to XIT’s total 37 per cent performance — the other 15 companies in the index wash out and are almost insignificant by comparison,” Daniel Straus, director of ETFs & financial products research at National Bank Financial Markets, told Yahoo Finance Canada.

Who should invest

XIT is capped, so one holding can’t dominate the portfolio beyond what we see today, but the fact that it’s so concentrated has meant it has lived and died on the fortunes of companies like BlackBerry and Nortel in the past. But Straus says it can be an ETF to consider for the right type of investor.

“For investors who are particularly bullish on technology and feel that the forever-changed post-pandemic environment will only continue to favour themes like remote work, long distance video telecommunication, digital entertainment, and cloud services, then a tech ETF could make sense as a small ingredient in a portfolio to express this view,” he said.

“XIT in particular is likely to remain quite concentrated no matter what happens to Shopify or whatever ‘next’ tech company comes to dominate its performance, and investors should remember that if its success rests on the performance of any single stock, then they might face the possible downside tied to the same specific name.”

Canadian tech stocks are also not immune from the effects of broad tech selloffs in the U.S. because the two are highly correlated.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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