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Canada ETFs in Focus as GDP Growth Stalls

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Economic Data


Canada’s GDP growth remained unchanged in October compared with economists’ forecast of a 0.2% increase and a rise of 0.2% in September. The Canadian dollar weakened following the release of the report.


The rise in service industries was offset by a decline in good manufacturing industries. Per Statistics Canada, service-producing industries increased 0.2% in October on a monthly basis, while goods-producing industries contracted 0.4%. Although wholesale trade increased 1.4%, a 1.1% contraction in the mining and oil and gas extraction industry weighed on growth in goods-producing industries.


Real estate activity increased 0.3% in October. Moreover, household debt has been surging in Canada due to the extremely low interest rate environment and hit a fresh high recently. The ratio of household credit to personal disposable income increased to 171.1% in the third quarter compared with 170.1% in the previous quarter.


However, Canada’s retail sales grew 1.5% in October compared with market expectations of a 0.3% increase. On a year-over-year basis, retail sales grew 6.7%. This was primarily driven by an increase in car sales. This was because sales in the auto industry increased 3.3% in October.


Odds of a Rate Hike?


The Bank of Canada (BoC) increased interest rates for the first time in seven years in its July 2017 meeting. On Sep 6, the key interest rate was hiked for the second time in a year from 0.75% to 1%.


Consumer prices increased 2.1% year-over-year in November compared with 1.4% in the previous month. However, the recent weakness in GDP figures reduces the probability of the central bank hiking interest rates in January (read: Canada Holds on to Rates: ETFs in Focus).


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 $3.1 billion and charges 48 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.2%, 21.2% and 10.4% allocation, respectively (as of Dec 22, 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 8.3%, 7.5% and 5.5% allocation, respectively (as of Dec 22, 2017). It has returned 11.6% year to date and 11.9% in a year (as of Dec 22, 2017). EWC currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


SPDR MSCI Canada Quality Mix ETF


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 $39.3 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 39.5%, 13.6% and 9.7% allocation, respectively (as of Dec 22, 2017). 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 4.3%, 4.2% and 3.9% allocation, respectively (as of Dec 22, 2017). It has returned 12.5% year to date and 12.8% in a year (as of Dec 22, 2017). QCAN currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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