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The sharp decline in share prices in the energy sector has left this country's investors – even the ones passively invested in equities – even more aggressively exposed to Canada's domestic economy, just as more and more warnings are heard about the financial sector and the Canadian consumer.

The pullback in energy stocks has reduced that sector's presence in the S&P/TSX composite index of 250 of Canada's largest stocks, as well as in the S&P/TSX 60, which has a similar composition.

Whereas energy stocks made up more than 26 per cent of the composite at the end of July, 2014, their share of the index slipped below 21 per cent at the end of February.

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Canada's financial sector, led by its banks and major insurers, maintained its dominant share of nearly 35 per cent of the composite.

And a chunk of energy's decline was picked up by the shares of companies who cater to Canadian consumers; they now represent more than 10 per cent of the composite, up from just over 8 per cent.

These small changes in percentages may not sound like much. But there are $471-billion in mutual funds and exchange-traded funds whose returns are closely correlated with the composite, including those who explicitly say they're tracking that index, according to Morningstar. Add in the individual stocks' holdings – the banks are wildly popular investments for individuals, given their dividends and long track records of success – and it's possible Canadian investors have never been so exposed to their own country's health – at so precarious a time.

"People own bank stocks, they love bank stocks; they won't sell them because the dividends are great and they don't see any risk at all in owning bank stocks," says Hilliard MacBeth, an adviser at Richardson GMP. "On top of that, they own more exposure to that sector than they realize because if they own a balanced mutual fund, or if they have a pension plan at work, or any of a number of possibilities, those entities probably have a weighting in financials, as well, so there's double or triple concentration."

Mr. MacBeth, to be clear, has a pointed view: He is publishing a book, When the Bubble Bursts: Surviving the Canadian Real Estate Crash. He has pulled all his clients' money from domestic Canadian banks, and has limited his Canadian equity exposure to companies with international scale.

The naysayers on Canadian real estate, many of whom have been sounding warnings of varying degrees for several years now, have been mocked by boosters as this country's house prices have marched steadily upward. A more middle course, cautious but optimistic, could be heard this week from Toronto-Dominion Bank CEO Bharat Masrani, who told his bank's shareholders that "our view is that a correction, if and when it takes place, would be orderly, that markets will react in an appropriate way."

Canadian investors, nearly across the board, must hope he's right. Four years ago, as gold was making a steady upward climb, materials stocks made up 22 per cent of the TSX composite. Adding in energy's share, resources made up half the composite.

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The solid performance of Canada's banks, insurers and brokers in the face of gold's pullback, however, has increased financials' share of the composite from about 28 per cent in February, 2011, as gold was approaching its peak, to that 35-per-cent level today.

Add in gains from stocks in the consumer discretionary and consumer staples sectors, which have also picked up mining and energy's lost share, and the chunk of the composite that is linked to the Canadian consumer is up about 45 per cent at last month's end. (Some Canadian consumer stocks, such as Tim Hortons' parent Restaurant Brands International Inc. and Alimentation Couche-Tard, do have significant international holdings that offer a blunting of the reliance on Canadians.)

"If you look at the ETFs that cover the Canadian market, like the XIU [iShares S&P/TSX 60 Index], 37.5 per cent of that baby is financials, so financials are driving a very large percentage of our market," says Kerry Harman, a portfolio manager with Burgeonvest Bick Securities Ltd. "If you compare that with the U.S., the Dow Jones industrial average ETF is 16 per cent, and the S&P 500 ETF is 16 per cent, too."

A lot of this Ms. Harman attributes to a "hollowing out" of industry in Canada, including certain miners and steel makers; a loss of headquarters such as Falconbridge and Molson; and a handful of "blunders," such as Nortel Networks, which has disappeared, and BlackBerry, which is trying not to. The solution for Canadian investors, according to Ms. Harman? Go global, particularly since the limits on foreign holdings in RRSPs have been repealed. "You don't have to go to far-flung countries – just look south of the border. Those big multinationals can do a lot of the heavy lifting for investors who are concerned about what exchange their investments are traded on."

ETFs and mutual funds with international holdings offer Canadians a choice of hedged or unhedged to currency exposure, Ms. Harman says. "Here, we have been unhedged for the past year and a half, and even with very conservative investments, we've made a good bulk of our return on being unhedged to the U.S. dollar. If you believe the Canadian dollar is going to fall, as Canadians, we want to be unhedged, because we want to capitalize."

"If you look at the currency, plus the companies, it's where the U.S. can provide great opportunities for Canadian investors," she says. "Because our market is now so small, and limited."

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