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After being on hold since January to assess the repercussions of its rate hike policy, the Bank of Canada, raised its overnight rates to a 22-year high of 4.75%. The bank had been increasing the borrowing costs since March 2022 before pausing in January this year, taking it to a 15-year high of 4.5%. It had increased its rates eight times, its fastest tightening cycle yet.
According to Reuters, markets and analysts predict an additional hike in the following month, aiming to moderate an overheating economy and combat persistently high inflation. The central bank stated that a statement, highlighting unexpectedly robust consumer spending, a resurgence in service demand, a revival in housing activity, and a constrained labor market, indicating a more enduring excess demand than previously estimated.
The Bank of Canada expressed concerns about rising inflation in April and the sustained elevation of three-month core inflation measures, raising apprehensions that CPI inflation may substantially surpass the 2% target.
Let’s Dive Deeper Into the Decision
Money markets are indicating a 60% likelihood of another rate hike in July, with further tightening fully priced in by September. The last instance when the rate reached 4.75% was observed during the months of April and May in 2001.
In April, annual inflation experienced an acceleration, marking the first upturn in 10 months, reaching 4.4%. Additionally, the GDP for the first quarter surpassed the Bank of Canada’s forecast of 2.3%, rising by 3.1%. It is anticipated that the economy will expand by 0.2% in April.
While the bank still projects a slowdown in inflation to 3% during summer, it refrained from reiterating its previous statement that it would gradually decrease to the 2% target by the end of next year, as stated in its April forecasts.
Tough Time for Canada ETFs?
The continuous ceasing of easy money amid the monetary policy tightening cycle may cause a pressure on the Canadian corporate world. However, investors should note that most of the pure-play Canada ETFs are heavy on the financial sector which tends to perform well in a rising rate environment. Plus, the energy sector, which Canada ETFs are heavy on, should do well given the supply shortage of oil amid tight OPEC+ supplies.
Hence, Canada ETFs may withstand severe shocks emanating from continuous rate hikes. Still, Canada ETFs underperform the S&P 500 this year by a wide margin. Below we highlight a few ETFs with exposure to pure-play Canada ETFs.
iShares MSCI Canada ETF seeks to closely track the performance of the MSCI Canada Custom Capped Index, which consists of stocks traded primarily on the Toronto Stock Exchange. The fund has a basket of 87 securities with major allocations to financials, energy and industrial sectors with a share of 35.3%, 17.65% and 12.14%, respectively.
EWC has top holdings in Royal Bank of Canada (RY - Free Report) , The Toronto Dominion Bank (TD - Free Report) and Enbridge (ENB - Free Report) with 7.14%, 5.91% and 4.26% of the fund respectively. The fund has gathered an asset base of $3.2 billion and charges an annual fee of 0.5%.
It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. EWC has generated 5.5% year to date but has lost around 7.51% over the past year.
JPMorgan BetaBuilders Canada ETF closely tracks the performance of the Morningstar Canada Target Market Exposure Index, which is a free-float adjusted market-cap weighted index consisting of stocks traded primarily on the Toronto Stock Exchange. The fund has a basket of 82 securities with major allocations to financials, energy and industrials sectors, each having a share of 34.2%, 17.5% and 14.3%, respectively.
BBCA has the top holdings in Royal Bank of Canada, The Toronto Dominion Bank and Enbridge with 7.09%, 5.9% and 4.27% of the fund, respectively. Having amassed an asset base of $6.01 billion, the fund charges an annual fee of 0.19%.
It has a Zacks ETF Rank #3 and has earned 5.61% year to date but has fallen by 6.69% over the past year.
The Franklin FTSE Canada ETF seeks to provide investment results that closely correspond to the performance of the FTSE Canada RIC Capped Index, which represents the performance of Canadian large and mid-capitalization stocks. Having 50 securities in its basket, the fund has major allocations to the financials, energy and industrials sectors, with each having a share of 38.3%, 18.04% and 12.47%, respectively.
FLCA has top holdings in Royal Bank of Canada, The Toronto Dominion Bank and Enbridge, with 8.29%, 6.78% and 4.89% of the fund, respectively. Having amassed an asset base of $283.82 million, the fund charges an annual fee of 0.09%.
It has a Zacks ETF Rank #3 and has earned 4.88% year to date but has fallen by 6.85% over the past year.
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Tough Time Ahead of Canada ETFs?
After being on hold since January to assess the repercussions of its rate hike policy, the Bank of Canada, raised its overnight rates to a 22-year high of 4.75%. The bank had been increasing the borrowing costs since March 2022 before pausing in January this year, taking it to a 15-year high of 4.5%. It had increased its rates eight times, its fastest tightening cycle yet.
According to Reuters, markets and analysts predict an additional hike in the following month, aiming to moderate an overheating economy and combat persistently high inflation. The central bank stated that a statement, highlighting unexpectedly robust consumer spending, a resurgence in service demand, a revival in housing activity, and a constrained labor market, indicating a more enduring excess demand than previously estimated.
The Bank of Canada expressed concerns about rising inflation in April and the sustained elevation of three-month core inflation measures, raising apprehensions that CPI inflation may substantially surpass the 2% target.
Let’s Dive Deeper Into the Decision
Money markets are indicating a 60% likelihood of another rate hike in July, with further tightening fully priced in by September. The last instance when the rate reached 4.75% was observed during the months of April and May in 2001.
In April, annual inflation experienced an acceleration, marking the first upturn in 10 months, reaching 4.4%. Additionally, the GDP for the first quarter surpassed the Bank of Canada’s forecast of 2.3%, rising by 3.1%. It is anticipated that the economy will expand by 0.2% in April.
While the bank still projects a slowdown in inflation to 3% during summer, it refrained from reiterating its previous statement that it would gradually decrease to the 2% target by the end of next year, as stated in its April forecasts.
Tough Time for Canada ETFs?
The continuous ceasing of easy money amid the monetary policy tightening cycle may cause a pressure on the Canadian corporate world. However, investors should note that most of the pure-play Canada ETFs are heavy on the financial sector which tends to perform well in a rising rate environment. Plus, the energy sector, which Canada ETFs are heavy on, should do well given the supply shortage of oil amid tight OPEC+ supplies.
Hence, Canada ETFs may withstand severe shocks emanating from continuous rate hikes. Still, Canada ETFs underperform the S&P 500 this year by a wide margin. Below we highlight a few ETFs with exposure to pure-play Canada ETFs.
ETFs in Focus
iShares MSCI Canada ETF (EWC - Free Report)
iShares MSCI Canada ETF seeks to closely track the performance of the MSCI Canada Custom Capped Index, which consists of stocks traded primarily on the Toronto Stock Exchange. The fund has a basket of 87 securities with major allocations to financials, energy and industrial sectors with a share of 35.3%, 17.65% and 12.14%, respectively.
EWC has top holdings in Royal Bank of Canada (RY - Free Report) , The Toronto Dominion Bank (TD - Free Report) and Enbridge (ENB - Free Report) with 7.14%, 5.91% and 4.26% of the fund respectively. The fund has gathered an asset base of $3.2 billion and charges an annual fee of 0.5%.
It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. EWC has generated 5.5% year to date but has lost around 7.51% over the past year.
JPMorgan BetaBuilders Canada ETF (BBCA - Free Report)
JPMorgan BetaBuilders Canada ETF closely tracks the performance of the Morningstar Canada Target Market Exposure Index, which is a free-float adjusted market-cap weighted index consisting of stocks traded primarily on the Toronto Stock Exchange. The fund has a basket of 82 securities with major allocations to financials, energy and industrials sectors, each having a share of 34.2%, 17.5% and 14.3%, respectively.
BBCA has the top holdings in Royal Bank of Canada, The Toronto Dominion Bank and Enbridge with 7.09%, 5.9% and 4.27% of the fund, respectively. Having amassed an asset base of $6.01 billion, the fund charges an annual fee of 0.19%.
It has a Zacks ETF Rank #3 and has earned 5.61% year to date but has fallen by 6.69% over the past year.
Franklin FTSE Canada ETF (FLCA - Free Report)
The Franklin FTSE Canada ETF seeks to provide investment results that closely correspond to the performance of the FTSE Canada RIC Capped Index, which represents the performance of Canadian large and mid-capitalization stocks. Having 50 securities in its basket, the fund has major allocations to the financials, energy and industrials sectors, with each having a share of 38.3%, 18.04% and 12.47%, respectively.
FLCA has top holdings in Royal Bank of Canada, The Toronto Dominion Bank and Enbridge, with 8.29%, 6.78% and 4.89% of the fund, respectively. Having amassed an asset base of $283.82 million, the fund charges an annual fee of 0.09%.
It has a Zacks ETF Rank #3 and has earned 4.88% year to date but has fallen by 6.85% over the past year.