The 2017 global stock market scorecard is a sea of green as both emerging markets and developed markets are posting solid year-to-date gains. Yet north of the U.S. border in Canada, major market indices are roughly flat on the year. Is that relative underperformance an opportunity? And if so, which Canada-focused exchange-traded funds are best positioned for a second-half rally?
As the year began, the Royal Bank of Canada pegged the nation’s 2017 growth rate at 2.1 percent. But a string of positive economic reports this past spring have bumped that forecast up to 2.6 percent. If it holds, that would be the best showing since 2011.
Some of the gains are coming from a currency swing with the country’s largest trading partner. The Canadian dollar has weakened by 30 percent against the U.S. dollar since the start of 2013. As a result, Canada is now running a modest trade surplus with the U.S. after an extended run of annual trade deficits.
The nation’s factories reflect that trend. The Canada RBC Manufacturing Purchasing Managers Index (PMI) survey has been above 55.0 for the past three months, the longest such stretch in six years.
So why is the iShares MSCI Canada ETF (EWC), the largest and broadest proxy for the economy, simply trading at break-even levels this year? “The Canadian economy is very sensitive to commodity prices, which are having an off-year,” says Ryan Issakainen, ETF strategist at First Trust Advisors.
The current slump in oil prices has taken a toll. Much of Canadian crude is derived from the tar sands of Alberta where high drilling costs have made the region less competitive with U.S. shale regions.
Those high drilling costs are leading to falling output. The Canadian Association of Petroleum Producers recently trimmed its 2030 peak production forecast for Canadian tar sands oil by 30 percent, to around 3.7 million barrels per day.
That suggests caution when it comes to Canada-focused ETFs that have too high a weighting in the energy sector. The Guggenheim Canadian Energy Income ETF (ENY), for example, has fallen more than 10 percent this year, and could fall further if oil prices fail to rebound and Canadian energy producers start to become financially stressed.
The iShares MSCI Canada ETF, with $3 billion in assets and a 0.48 percent expense ratio, also has an above-average exposure to oil prices. For example, 22 percent of the fund is earmarked for energy stocks. A further 38 percent of the fund is invested in the nation’s finance sector.
The SPDR MSCI Canada StrategicFactors ETF (QCAN), which has a category-best 0.30 percent expense ratio, has a lesser 12.6 percent weighting in energy. That fund uses the universe of stocks found in the Canada MSCI index, and then boosts individual weightings based on earnings quality and volatility.