Canada ETFs Rise On Interest Rate Hike

by on June 2, 2010 | ETFs Mentioned:

Among the developed economies that have weathered the recent fiscal storm, Canada stands out as one of the biggest winners, thanks to the conservative nature of the country’s banks and the vast resource empire that has helped to spur growth while many other sectors have languished. The relatively rosy state of the “other North American economy” was evident on Tuesday when the Bank of Canada raised its benchmark rate 25 basis points to 0.5%, making Canada as the first G-7 nation to hike rates in the aftermath of the financial crisis.

The rate hike follows a robust economic growth rate of 6.1% in the first quarter, which was the best among industrialized nations. Canadian job growth also surged in April, when 100,000 new jobs were created. Strong growth and receding unemployment figures have helped to slash into the nation’s budget deficit, which has held steady at around 3% of GDP, far lower than the U.S. (which is predicted to post a deficit of 10%). This suggests that the Canadian dollar is poised to be one of the stronger currencies for the foreseeable future. These bullish indicators combined with the rate hike to boost several ETFs tracking the Canadian market higher; the iShares MSCI Canada Index Fund (EWC) and Rydex CurrencyShares Canadian Dollar Trust (FXC) were up 2.7% and 1.3%, respectively, on Wednesday (also read this Guide To Canadian ETFs).

EWC In Focus

EWC tracks the MSCI Canada Index, which measures the performance of the Canadian equity market. The fund holds about 100 securities, of which 53% are concentrated into giant capitalization companies; large caps make up an additional 31%. In terms of sectors, financials make up the highest allocation, coming in at about 35% with energy (22%), and industrial materials (19%) also making up material portions of the fund. The fund is up 12.5% over the past 52 weeks and it has managed to squeeze out a gain thus far in 2010, climbing about 1% (also see ETF Ideas For An “Ex-Europe” Portfolio).

Another option available to investors seeking broad Canada exposure is the relatively new IQ Canada Small Cap ETF (CNDA). The fund, which tracks small caps in Canada, was up only 0.7% on the rate hike news. CNDA maintains a heavier focus on materials, which make up about 50% of the fund’s total assets (see more info on CNDA’s fact sheet).

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Disclosure: No positions at time of writing.