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Canada ETFs in Spotlight as Rate Hike Odds Rise

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Consumer prices in Canada beat analysts’ expectations last month, reaching the highest level since October 2014. Rising inflation and low unemployment have increased the odds of the Bank of Canada hiking borrowing costs faster than anticipated (read: How to Trade Canada ETFs on Populist Budget?).

Rising prices of crude, a major export for the commodity-dependent economy, drove inflation. Recently, increasing geopolitical risks involving Iran contributed to the rally in crude, as President Trump has been considering backing out from the Iran nuclear deal.

Into the Headlines     

Canada’s annual pace of inflation increased to 2.2% in February, the highest in more than three years and above the central bank’s 2% target, per Statistics Canada. Moreover, February’s reading was well above 1.7% reported in the prior month.

Core prices, which exclude volatile items like energy and food, increased at the highest pace since February 2012 to 2.03% this February. The common core increased to 1.9% from 1.8% in the prior month. The median rate climbed to 2.1% from 1.9% while the trim measure increased to 2.1% from 1.8%.

Although inflation numbers hint at chances of faster rate hikes by the Bank of Canada, there are some headwinds that policymakers may have to face before coming to a decision. Among the major concerns, retail sales grew a mere 0.3% in February compared with analyst expectations of 1.1%. Moreover, uncertainty surrounding the United States trade policy and NAFTA negotiations cloud the outlook on monetary policy decisions in the near future (read: Country ETFs to be Impacted by Trump's Tariff Plans).

"All told, today's data does create the risk that the Bank of Canada moves sooner, but with downside risks to the economic outlook still elevated, this summer remains most likely to see the next policy interest rate hike," per a CP24 article citing TD Bank senior economist James Marple.   

Canada’s central bank has hiked prime rates thrice since July 2017 even though it is fighting trade uncertainty with its neighbor — the United States. Following the inflation report, the Canadian dollar rallied and jumped to an 11-day high.

As a result, multiple economists expect the central bank to speed up rate hikes but hold on at least for the next few months. “The Bank has got a bit of a conundrum here. There is no doubt the inflation numbers are quite a bit stronger than I’d expected. The caveat however is you’ve got very soft growth indicators,” per a Reuters article citing Derek Holt, head of capital markets economics at Scotiabank.

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 $2.6 billion and charges 49 basis points in fees every year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.8%, 19.8% and 10.7% allocation, respectively. From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Toronto Dominion Bank and Bank of Nova Scotia, with 8.5%, 8.0% and 5.6% allocation, respectively. It has returned 4.5% in a year. EWC has a Zacks ETF Rank #3 (Hold), with a Medium risk outlook.

SPDR MSCI Canada Strategic Factors 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 $40.0 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 39.9%, 12.8% and 9.6% allocation, respectively. From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Toronto Dominion Bank and Canadian Imperial Bank of Commerce, with 4.4%, 4.2% and 4.2% allocation, respectively. It has returned 6.3% in a year. QCAN has a Zacks ETF Rank #3, with a Medium risk outlook.

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