Canada Holds on to Rates: ETFs in Focus

Economic Data

 

Canada’s consumer prices increased 1.4% year over year in October compared with 1.4% in September, primarily owing to small increases in gasoline prices. Hence, the inflation figure is still far from Bank of Canada’s 2% target and provides it room to hold on to rate hikes for the time being.

 

On a year-over-year basis, Canada’s GDP grew 1.7% in the third quarter of 2017, above market expectations of 1.6% increase. However, the third quarter reading was a lot lower than 4.3% growth registered in the second quarter.

 

No Rate Hikes in the Near Future?

 

The Bank of Canada (BoC) increased interest rates for the first time in seven years in its July 2017 meeting. Then on Sep 6, the key interest rate was hiked for the second time this year from 0.75% to 1%. However, recent inflation data shows that consumer price inflation is still far from BOC’s 2% target. 

 

Moreover, weakness in GDP growth is expected to create some room for policymakers to go slow on rate hikes. "While higher interest rates will likely be required over time," the bank said, "the current stance of monetary policy remains appropriate."

 

Moreover, policymakers also cited concerns over trade deals as reasons for holding rates in the near future. There has not been much progress in NAFTA talks as the fifth round of negotiations closed in Mexico. "Some of the proposals that we have heard would not only be harmful for Canada but would be harmful for the U.S. as well," Canadian Foreign Minister Chrystia Freeland said (read: ETFs Impacted by Nafta Talks).  

 

However, unemployment rate in Canada fell to 5.9% in November compared with 6.3% in the previous month. This was the lowest unemployment rate registered since February 2008. Moreover, wage growth has been impressive. 

 

Economists are in disagreement over how many rates hikes can be expected in 2018. The interest rate still remains 2% below what BOC considers neutral. Although Bank of Canada governor Stephen Poloz did not provide clear direction as to what can be expected, he has stated that further rate hike decisions will be data driven.

 

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

 

iShares MSCI Canada ETF 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 $3.1 billion and charges 48 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.4%, 21.5% and 9.9% allocation, respectively (as of Dec 5, 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 8.3%, 7.5% and 5.5% allocation, respectively (as of Dec 5, 2017). It has returned 9.9% year to date and 10.0% in a year (as of Dec 6, 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 to gain exposure to Canadian equities but at the same time avoiding the inherent risks that small-cap investments bring.

 

The fund manages AUM of $39.4 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 39.7%, 13.8% and 9.7% allocation, respectively (as of Dec 5, 2017). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Canadian Imperial Bank of Commerce and Toronto Dominion Bank, with 4.2%, 4.1% and 3.9% allocation, respectively (as of Dec 5, 2017). It has returned 11.1% year to date and 12.0% in a year (as of Dec 6, 2017). QCAN currently has a Zacks ETF Rank #3 with a Medium risk outlook.

 

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Economic Data

Canada’s consumer prices increased 1.4% year over year in October compared with 1.4% in September, primarily owing to small increases in gasoline prices. Hence, the inflation figure is still far from Bank of Canada’s 2% target and provides it room to hold on to rate hikes for the time being.

On a year-over-year basis, Canada’s GDP grew 1.7% in the third quarter of 2017, above market expectations of 1.6% increase. However, the third quarter reading was a lot lower than 4.3% growth registered in the second quarter.

No Rate Hikes in the Near Future?

The Bank of Canada (BoC) increased interest rates for the first time in seven years in its July 2017 meeting. Then on Sep 6, the key interest rate was hiked for the second time this year from 0.75% to 1%. However, recent inflation data shows that consumer price inflation is still far from BOC’s 2% target. 

Moreover, weakness in GDP growth is expected to create some room for policymakers to go slow on rate hikes. "While higher interest rates will likely be required over time," the bank said, "the current stance of monetary policy remains appropriate."

Moreover, policymakers also cited concerns over trade deals as reasons for holding rates in the near future. There has not been much progress in NAFTA talks as the fifth round of negotiations closed in Mexico. "Some of the proposals that we have heard would not only be harmful for Canada but would be harmful for the U.S. as well," Canadian Foreign Minister Chrystia Freeland said.  

However, unemployment rate in Canada fell to 5.9% in November compared with 6.3% in the previous month. This was the lowest unemployment rate registered since February 2008. Moreover, wage growth has been impressive. 

Economists are in disagreement over how many rates hikes can be expected in 2018. The interest rate still remains 2% below what BOC considers neutral. Although Bank of Canada governor Stephen Poloz did not provide clear direction as to what can be expected, he has stated that further rate hike decisions will be data driven.

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

iShares MSCI Canada ETF (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 $3.1 billion and charges 48 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.4%, 21.5% and 9.9% allocation, respectively (as of Dec 5, 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 8.3%, 7.5% and 5.5% allocation, respectively (as of Dec 5, 2017). It has returned 9.9% year to date and 10.0% in a year (as of Dec 6, 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 to gain exposure to Canadian equities but at the same time avoiding the inherent risks that small-cap investments bring.

The fund manages AUM of $39.4 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 39.7%, 13.8% and 9.7% allocation, respectively (as of Dec 5, 2017). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Canadian Imperial Bank of Commerce and Toronto Dominion Bank, with 4.2%, 4.1% and 3.9% allocation, respectively (as of Dec 5, 2017). It has returned 11.1% year to date and 12.0% in a year (as of Dec 6, 2017). QCAN currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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ISHARS-CANADA (EWC): ETF Research Reports
 
SPDR-MSCI CSF (QCAN): ETF Research Reports
 
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