In an article in the Wall Street Journal, Evelyn Juan recently highlighted some of the trends emerging in the ETF industry to our north. It seems that Canadian investors, much like their U.S. counterparts, are warming to the concept of exchange-traded products as efficient alternatives to pricey mutual funds. Not surprisingly, Juan points out that several financial advisers are warning against relying too heavily on ETFs as a core portfolio component.
According to data recently released by TMX Group, more than 100 exchange-traded products are now listed on the Toronto Stock Exchange, with a total market capitalization of more than C$28 billion. In June 2009, ETF trading accounted for 14% of total trades on the TSX, up nearly 500% from the same period last year. However, many of the ETFs offered on Canadian exchanges don’t offer sufficient diversification across industries, with many of them maintaining large allocations to natural resourcecompanies that comprise a large part of the Canadian economy. As such, many advisers prefer international funds over domestic (Canadian) ETFs, as they offer better diversification and more global exposure.
I did find one note in Juan’s article to be particularly amusing: it seems that some advisers (in this case a Ms. Tehranchian at Assante Wealth Management) believe ETFs can work well in a bull market by simply following indexes that are going up. But when the economy is going sideways, “securities selection and active management to beat the index make a difference.” I think the absurdity of this statement is obvious enough, so I’ll leave it at that for now.
For U.S. investors looking to gain exposure to the Canadian equity markets, the iShares MSCI Canada Index Fund (EWC) is perhaps the best option. EWC is dominated by large cap companies, with average and median market capitalizations of $17.3 billion and $3.4 billion, respectively (as of March 31). The fund is fairly well diversified, with 100 holdings primarily in the financials (30.2%), energy (27.8%), and materials (20.6%) industries. EWC is up more than 25% so far in 2009.
Disclosure: No positions at time of writing.