ETFs in Focus Post the Canadian Federal Budget

Canada released its federal budget on March 22. It plans to issue C$142 billion of bonds next fiscal year to finance its budget deficit. It also plans to spend C$11.2 billion on housing initiatives over a period of 10 years.

 

Investors were looking forward to outlays for innovation and infrastructure and tax laws.

 

The government expects to expedite the process of picking innovation clusters. It plans to invest in areas where Canada has a strong presence. The budget sets aside an investment of C$950 million over a period of five years to support innovators. Prime Minister Trudeau’s government is looking at innovation to bolster startups and expand economic growth.

 

The next focus area is infrastructure. Canada is planning to launch a government infrastructure bank to spur development of projects across the country. The bank will start with C$35 billion from the government, which is part of the C$180 billion planned infrastructure spending over the next 12 years. The government hopes to attract private capital investments by taking a subordinate equity stake in projects, hence lowering the risk exposure of private investors. The focus will be on new builds rather than expansion and hence a higher risk premium would be required to get investors on board. The government hopes to start the bank by the end of this year. However, stakeholders stated that the government was light on infrastructure policies in the budget.

 

Canada boasts a really low debt-to-GDP ratio, at about 31.5% in 2016/2017. Moreover, according to projections released by the government, it is expected to further reduce to less than 31% by 2021/2022. 

 

Next up are taxes. The business community was relieved to know that taxes in Canada have not been changed. Considering U.S President Donald Trump’s plan to cut corporate taxes to 15%, hiking taxes in Canada would not have been viable for staying competitive. Tobacco and alcohol, however, took a hit in terms of taxes (read: Welcome Trump Era with These ETFs).

 

The overall picture for Canada seems quite encouraging. We, therefore, discuss the following ETFs that have the potential to boost portfolio returns for investors looking to gain exposure to the economy:

 

iShares MSCI Canada ETF (EWC - Free Report)

 

This fund is one of the most popular funds offering exposure to the Canadian economy. It is an appropriate bet for investors who are bullish on the overall performance of Canadian mega cap firms.

 

The fund manages AUM of $3.32 billion and charges 49 basis points in fees per year. Financials, Energy, and Basic Materials have almost three-fourths of fund assets allocated to them. The fund trades in an average volume of 2.67 billion shares. It returned 0.61% in the year-to-date time frame and 12.9% in the past one year. EWC currently has a Zacks Rank #2 (Buy) with a Medium risk outlook (read: Canada ETF Hits New 52-Week High).

 

SPDR MSCI Canada Quality Mix ETF

 

This fund targets exposure to large-cap companies in Canada. It is an appropriate bet for investors looking to gain exposure to Canadian equities but at the same time avoiding the inherent risks that small cap investments face.

 

The fund manages AUM of $30 million and charges 30 basis points in fees per year. Financials, Energy, and Consumer Cyclical have almost 60% of the fund’s assets. The fund trades in an average volume of 6,375 shares. It returned 1.3% in the year-to-date time frame and 10.7% in the past one year. QCAN currently has a Zacks Rank #2 with a Medium risk outlook.

 

 

Though certain questions remain unanswered about the future of infrastructure policies of the Canadian government, outlook for innovation and economic growth in Canada remains strong. We, therefore, think Canadian investments can be a good global diversifier for a portfolio to enhance investment returns.

 

 

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