Americans who are concerned about the safety or yields of stocks or bonds at home may turn to foreign investments. Canada has long been a destination for U.S. investors, as Americans can invest in a variety of Canadian bonds, stocks and international mutual funds. By diversifying in the Canadian market, American investors gain safety, as Canadian bonds are backed by the country's government, while minimizing risk, should there be a downturn in the U.S. economy.
Investing in Canadian Bonds
Canada is a country blessed with abundant natural resources such as oil, timber and agriculture, as well as stable federal and provincial bureaucracies. Much like the federal government in Washington, the government of Canada sells various types of debt instruments to finance their operations, including treasury bills, real-return bonds and fixed-coupon marketable bonds. Canadian bonds may look especially attractive if the investor expects the U.S. dollar to rise against the Canadian dollar over the life of the investment.
Buying From U.S. Broker
Many brokers within the U.S. offer access to individual Canadian bonds, as well as bond-based mutual funds and exchange-traded funds, or EFTs. Foreign brokers must be licensed with the government of Canada to offer bonds to their customers, but many large brokerage firms that have international offices in both the U.S. and Canada, as well as some online brokers, are licensed to sell Canadian bonds to Americans.
As in the U.S., Canadian bonds are sold at auction, so if your intent is to buy individual bonds, the timing of your purchase would depend on the availability of bonds to be sold. Because your U.S. dollars would need to be converted first to Canadian dollars before your bond purchase goes through, buying individual bonds may not be as convenient as a mutual fund or an ETF available through a Canadian bank or brokerage.
In addition to fluctuations in the currency exchange rate, Americans investing in Canadian bonds will likely be expected to pay Canadian taxes on any gains they receive on their investments within the country. The Internal Revenue Service may allow those Americans to take a foreign tax credit on their U.S. taxes. Because foreign tax credit laws are complicated, you may wish to consult a tax adviser before embarking on an investment outside of the U.S. to avoid double taxation.
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