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How to Trade Canada ETFs on Populist Budget?

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Canada’s 2018 federal budget seems to be a gender-conscious budget, creating a clear path of actions to be taken by the Liberals ahead of the 2019 elections. “It is a plan that puts people first – that invests in Canadians and in the things that matter most to them,” Finance Minister Bill Morneau told the House of Commons in his budget speech.

The Background

At a time when Canada is plagued with concerns over its economic well-being and competition from the United States, Morneau’s budget did little to alleviate those concerns. Instead of convincing investors about why Canada remains an attractive investment destination, it was focused more on equality (read: Canada ETFs in Focus as Inflation Slows).

Let’s face it, women comprise half the cabinet of Canada and also contribute a huge portion of votes to the Liberals. Per a CBC article, citing an opinion poll by Nanos Research, Liberals trail the Conservatives in support among men, 38% vs 33%. On the other hand, when it comes to women, Liberals lead 42% to 25%, enough to justify the measures adopted in the budget to maintain the status quo.

The 367-page document has a gender narrative, titled “Equality Growth: A Strong Middle Class.’’ It focuses on equality and aims at increasing labor force participation rate among women. The government has introduced a net of C$20.3 billion in new measures net of taxes, through 2022, taking the deficit to C$18.1 billion in the fiscal beginning April 1, slightly below C$19.4 billion in the current period.

More Into the Headlines    

One of the highlights of the budget is pushing back infrastructure spending through 2019, as C$7.2 billion cut out from the landmark infrastructure plan will be reallocated to other departmental spending. The government plans to spend on infrastructure in the latter half of the fiscal. However, infrastructure being key to giving a boost to the country’s growth, it might have a negative impact on optimism among investors.

Allocating C$187 million over the next five years, the government aims to deal with gender-based violence and sexual assault, while it plans to spend C$100 million on women’s groups and C$1.8 million to educate men on gender equality. Morneau’s budget also highlighted its aim to spend C$30 million to boost women’s participation in sport and an increase in excise taxes on tobacco products.

The budget also aims at spending C$3.2 billion over five years for Canada’s science and research segment and C$2.6 billion over the same time period to encourage innovation and equality in the field.

Another highlight was the government’s plan to reduce bond issuance in 2018-19 to C$115 billion, down 17% from the prior year. This is expected to bring down the debt to GDP ratio to 28.4% by 2022 from 30.4% in 2017-18, per a Bloomberg analysis.

However, Canadian firms are worried about Morneau’s silence on how he plans to tackle President Donald Trump’s threats on taking a beat on Canada’s competitiveness. Businesses cited concerns over the future of NAFTA weighing on the economy’s outlook, as the protectionist stance of the Trump administration might weigh on Canada’s export-dependent economy (read: ETFs to Watch On NAFTA Talks).

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 $3.0 billion and charges 49 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.5%, 20.3% and 10.6% allocation, respectively (as of Feb 26, 2018). 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%, 7.8% and 5.4% allocation, respectively (as of Feb 26, 2018). It has returned 6.5% in a year. EWC has a Zacks ETF Rank #3 (Hold), with a Medium risk outlook.

SPDR MSCI Canada Quality Mix 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 $41.5 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 39.6%, 13.0% and 9.5% allocation, respectively (as of Feb 26, 2018). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Canadian Imperial Bank of Commerce and Toronto Dominion Bank, with 4.4%, 4.2% and 4.1% allocation, respectively (as of Feb 26, 2018). It has returned 9.5% 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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