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Financial Weakness Dragging on Canada ETFs


The Canadian banking sector is on pace for its worst start to a new year in 25 years, dragging on Canada country-specific exchange traded funds.

Year-to-date, the iShares MSCI Canada ETF (EWC) declined 7.9% while the First Trust Canada AlphaDEX Fund (FCAN) decreased 11.2%.

The Standard & Poor’s/TSX Commercial Banks Index fell 9.5% over January, the worst start to a year since the 12% fall in January 1990, as the plunge in oil prices and weakness in spending begin to weigh on profits, reports Doug Alexander for Bloomberg.

“The negative, uncertain outlook for Canada’s economy will continue to weigh on the Canadian banks, challenging the group’s earnings over the near term,” John Aiken, an analyst at Barclays Plc, said in a note.

Barclays downgraded four of the country’s banks, including Bank of Montreal, Royal Bank of Canada, Toronto-Dominion Bank and Laurentian Bank of Canada to the equivalent of sell from hold. Additionally, the analyst projects profits among the six-largest banks to gain 3.1% this year, the slowest since 2009.

EWC includes a 7.0% weight in the Royal Bank of Canada, 6.2% in Toronto Dominion and 3.2% in the Bank of Montreal. The financials sector makes up 36.8% of EWC. FCAN, on the other hand, takes a smaller tilt toward financials at 14.1%.

Moreover, Bank of Canada’s surprise rate cut potentially indicates a poorer outlook for the economy. After a plunge in oil prices, the growth in the economy and jobs has been destabilized, which will further weigh on Banks’ already weak consumer lending. [Tepid Response by Canada ETFs to Surprise Rate Cut]

“The action from the central bank implies lower economic growth than is currently reflected in the market,” Aiken said. “We do not anticipate a significant uptick in consumer loan demand and believe that incremental margin compression is likely.”

Domestic lending is currently slowing as indebted Canadians pare borrowing on loans and mortgages. Specifically, the year-over-year mortgage growth last year was half that of eight years prior, according to Bank of Canada.

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. 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.