While international ETF investing has proliferated over the past few years, many investors have focused on far-away economies, forgetting markets much closer to home that can offer compelling returns. Canada likely doesn’t come to mind when most investors are looking to achieve geographic diversification, but ‘The Great White North’ has one of the most diversified economies in the developed world. In addition, the country is fiscally sound, is home to banks that are in a position of strength, and enjoys favorable diplomatic relations around the world. With the eyes of the world soon to be focused on Vancouver for the 2010 Olympics, Canadians will have an opportunity to show the world what many investors have already discovered.
Canada is one of the only First World nations that is an energy exporter. The country is a major supplier of oil to the United States and it has the 2nd most oil reserves on Earth. If Canada is able to unlock the vast reserves locked away in the oil shale, the country could experience a significant increase in wealth. In addition to its oil resources, the country is also the biggest uranium producer in the world, positioning it to benefit as the world shifts away from emission-heavy energy sources and towards greener technologies. Alternatively, if oil prices surge, Canada could potentially export more oil and increase use of uranium for power. This diverse resource base ensures that Canada will play a large role in energy policies for years to come.
Canada finds itself in a great position both geographically and fiscally. The country enjoys extremely friendly relations with its only neighbor and maintains generally favorable relations with the rest of the world. Although foreign relations are dominated by its ties to Great Britain and the United States, Canada has a very independent foreign policy and is on good terms with countries that the U.S. refuses to do business with such as Cuba.
Canada currently finds itself in the trillion dollar club of economies, making its economy one of the ten largest in the world. Canada is by far the smallest G-8 member (by population), giving the country outstretched influence on the world economic stage. In addition to this prestige, its banks have been rated the most stable out of any country, putting them in position to prosper when others struggle and perhaps make acquisitions at favorable terms.
Canada is experiencing a baby bust of its own, with the percentage of the population over the age of 65 quickly approaching 15%. This trend, coupled with large amounts of poor immigrants, threatens to tip the scales for the social programs in Canada and put a higher tax burden on younger citizens. Some figures suggest that in the next few decades the ratio of workers to retirees could reach 2:1, down from about 5:1 today. Should the ratio ever reach these levels, it could have a disastrous impact on Canada’s balance sheet, making many social programs economically unsustainable. This would force the government in Ottawa to raise taxes, cut benefits, or borrow, all of which are unpopular options for citizens.
Given Canada’s well developed capital markets and proximity to the U.S., it is surprising that there are only three ETFs that focus on Canada; two equity funds and one currency fund. The Rydex CurrencyShares Canadian Dollar Trust (FXC) tracks the value of the Canadian dollar relative to the U.S. dollar, allowing investors to gain exposure to the Loonie. FXC has experienced a low level of volatility with a standard deviation of 13.16 over the past 3 years and a beta of 0.46. The fund charges an expense ratio of 0.40% and it is up 14.1% in 2009.
The Claymore/SWM Canadian Energy Income Index ETF (ENY) seeks to track an index of oil sand producers and royalty trusts based in Canada. Its allocation between the two types of securities is determined by the moving average price of crude oil. When the price of oil is above the four quarter moving average price, the fund considers oil to be in a bull market and allocates 70% of the fund to oil sands and 30% to income trusts. The fund allocated the opposite weightings when oil meets bear market criteria. At present, this ETF is well-diversified across market cap weightings: large cap stocks make up about 40%, mid caps make up 35%, and small caps make up 25%. The fund charges an expense ratio of 0.65% and is up 45% in 2009. ENY also offers an attractive dividend yield of 5.1%.
The only diversified Canadian equity fund currently available to U.S. investors is the iShares MSCI Canada Index Fund (EWC). The fund tracks the performance of the Canadian equity market and currently has 98 different stocks in its portfolio. The sector weightings can be broken down into four categories; financials (33.8%), energy (26.5%), materials (20.25%) and miscellaneous sectors which make up the remainder of the fund and include minimal holdings in industrials, information technology, and consumer products. EWC charges an expense ratio of 0.52% and is up about 47% in 2009.
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Disclosure: No positions at time of writing.