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Canada Markets, ETFs Leave A Lot To Be Desired


Canada stocks and related country-specific exchange traded funds may keep underperforming as concern builds over the housing market and lower oil prices weigh on the energy sector and loonie currency.

Year-to-date, the iShares MSCI Canada ETF (EWC) is up 1.2% and the First Trust Canada AlphaDEX Fund (FCAN) , which employs growth and value screens to select holdings, declined 11.0%. The recently launched, SPDR MSCI Canada Quality Mix ETF (QCAN) , which includes value, quality and low volatility screens, has also dipped 2.8% over the past three months.

Exacerbating the fall out, a quickly depreciating Canadian dollar, or so-called loonie, has also cause greater currency risk with overseas Canadian equity exposure. For instance, the CurrencyShares Canadian Dollar Trust (FXC) , which tracks the Canadian dollar’s movement against the U.S. dollar, decreased 8.5% year-to-date. Since investing in Canadian equities also exposes an investor to the CAD, a weaker loonie translated to lower USD-denominated returns.

The safe-haven status of Canada’s banks are now in doubt due to persistent calls for a housing market correction and weak oil prices threaten the broader economy, writes Jonathan Ratner for Financial Post.

Due to the countries perceived commodity currency status, foreign investors have been using Canada for its energy exposure. However, the foreign investment crowd will follow the swing in energy prices. [Cheap Oil Crimps Canada ETFs]

“They use us as a light switch,” Jason Mann, portfolio manager at EdgeHill Partners, said in the article. “When they decide to leave resource stocks, they just exit Canada.”

Additionally, looking at valuations, Canada’s financials market appears to be trading near its peak.

“This market segment certainly doesn’t look like it’s at a trough, and there are plenty of arguments why it’s at a peak, so financials are a tough place to put your money,” Ramona Persaud, a portfolio manager at Fidelity Investments, said in the article.

The Canadian banking sector is also implementing structural changes, such as moving resources otu of higher-profit areas and pulling back on international expansions. Moreover, competitive pressures in retail banking are rising as economic growth slows. Consequently, Som Seif, chief executive of Purpose Investments Inc., argues that banks are acting more like utilities as it becomes harder to do business.

“The banks are getting tougher,” Seif said. “There is the potential for them to go lower, not higher.”

The Canada ETFs all include heavy exposure to financial and energy stocks. For instance, EWC includes 38.8% financials and 23.1% energy. FCAN holds 32.3% energy and 15.7% financials. Lastly QCAN has 33.4% financials and 21.9% energy.

iShares MSCI Canada ETF


For more information on Canada, visit our Canada category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.