Can Canadian ETFs Continue Their Rally?

Leader among the G-7

Canada’s economy expanded 4.5% on an annualized basis in the second quarter of 2017, as household spending surged, owing to strong consumer confidence. This was above market expectations of a gain of 3.7%.

Canadian economic growth beat Japan’s GDP growth figure in Q2 to lead the way in the Group of seven countries. Japan’s GDP grew for the sixth straight time in the second quarter of 2017. It expanded an annualized 4%, beating market expectations of 2.5%.

Consumer Confidence

Consumer confidence in Canada hit a 10-year high in August. It increased to 122.9 in August from 120 in July. Household spending increased an annualized 4.6% in the second quarter compared with 4.8% in the first quarter. The strong two-quarter increase is reflective of consumers’ confidence in the future income.

This has increased the odds of further rate hikes by Bank of Canada. The release of this data led to an increase in the Canadian dollar. Moreover, Canada’s unemployment rate fell to a seven-year low of 6.3% in July with net job gains of 10,900 (read: Canada Wholesale Sales Decline, Inflation up: ETFs in Focus).

The Bank of Canada (BoC) hiked interest rates for the first time in seven years in July. It increased its benchmark interest rate to 0.75% from 0.5% (read: Canada Hikes Rates: ETFs in Focus).

Risks Involved

However, the rate hike will not help oil producers in Canada, as higher borrowing costs have now been added to their plate when they are already battling low oil prices.

Moreover, the Canadian economy faces high trade risks from potential renegotiations in NAFTA. President Donald Trump in a rally in Arizona stated, “Personally, I don't think we can make a deal. I think we'll end up probably terminating NAFTA at some point.”

Let us now discuss a few ETFs focused on providing exposure to Canadian equities (see all Canadian Equity ETFs here).

iShares MSCI Canada ETF (AX:EWC)

This is one of the most popular funds offering exposure to Canada. It is a perfect bet for those who are bullish on the overall performance of Canadian large-cap firms.

The fund manages AUM of $3.12 billion and charges 48 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 41.73%, 21.31% and 10.74% allocation, respectively (as of August 30, 2017). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Toronto Dominion Bank and Bank of Nova Scotia, with 8.09%, 7.17% and 5.58% allocation, respectively (as of August 30, 2017). It has returned 5.97% year to date and 9.34% in the last one year (as of August 31, 2017). EWC currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

SPDR MSCI Canada Quality Mix ETF QCAN

This fund targets exposure to large-cap companies in Canada. It is an appropriate bet for those looking at gaining exposure to Canadian equities but at the same time avoiding the inherent risks that small cap investments bring.

The fund manages AUM of $37.12 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 40.04%, 11.71% and 9.21% allocation, respectively (as of August 30, 2017). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Toronto Dominion Bank and Canadian Imperial Bank of Commerce, with 4.25%, 4.17% and 3.90% allocation, respectively (as of August 30, 2017). It has returned 8.26% year to date and 10.01% in the last one year (as of August 31, 2017). QCAN currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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