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What Lies Ahead for Canada ETFs?

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Canada’s GDP growth was flat month over month in July compared with a 0.3% rise in June and below economists’ forecast of a 0.1% increase.


GDP grew 4.5% on an annualized basis in the second quarter of 2017. Therefore, despite the recent slowdown, the Canadian economy is expected to register a relatively strong performance in the third quarter (read: Can Canadian ETFs Continue Their Rally?).


Factors Driving GDP


The slowdown in GDP growth is primarily being attributed to the fall in output in oil and gas. Per a Bloomberg article, the oil and gas output declined 1.8%. Moreover, manufacturing declined 0.4% while construction declined 0.5%.


However, economists are still optimistic about the Canadian economy, primarily because of the strong growth it registered in the second quarter. Moreover, the average 0.4% increase in monthly GDP in 2017 is an impressive sign.


Moreover, earlier in September, the Organization for Economic Co-operation and Development (OECD) increased its expectations for Canadian GDP growth to 3.2% for 2017, up from June’s forecast of 2.8%. The OECD expects Canada to lead the way in terms of GDP growth in the G7 in 2017.


Will Bank of Canada Hike Rates Further?


The Bank of Canada (BoC) increased interest rates for the first time in seven years in its July 2017 meeting. Then on Sep 6, the key interest rate was hiked for the second time this year to 1% from 0.75%. The rate hikes came as the BoC governor aims to nullify the impact of the two rate cuts introduced in 2015 to battle falling oil prices (read: Canada ETFs Rise After Unexpected Rate Hike).


Canada’s big five banks — including Royal Bank of Canada, Bank of Montreal, TD Canada Trust, Bank of Nova Scotia and Canadian Imperial Bank of Commerce — hiked their prime rates to 3.2%. This is expected to weigh on the Canadian middle class as they feel the impact of rising rates on housing prices.


However, since the latest GDP report was the last before the BoC meets on Oct 25 to decide on monetary policy, a rate hike as soon as in October is quite unlikely. Although the economy is on a strong footing, the recent slowdown in GDP might give some room to policymakers to go slow on rate hikes.


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 - Free Report)


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 $3.07 billion and charges 48 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.3%, 21.9% and 10.0% allocation, respectively (as of Sep 29, 2017). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Toronto Dominion Bank and Bank of Nova Scotia, with 8.2%, 7.5% and 5.6% allocation, respectively (as of Sep 29, 2017). It has returned 10.0% year to date and 12.9% in a year (as of Sep 29, 2017). EWC currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


SPDR MSCI Canada Quality Mix ETF (QCAN - Free Report)


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 $38.75 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 40.2%, 12.3% and 9.1% allocation, respectively (as of Sep 5=28, 2017). From an individual holdings perspective, the fund has high exposure to Toronto Dominion Bank, Royal Bank of Canada and Canadian Imperial Bank of Commerce, with 4.4%, 4.3% and 3.9% allocation, respectively (as of Sep 28, 2017). It has returned 12.0% year to date and 13.7% in a year (as of Sep 29, 2017). QCAN currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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