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Canada ETFs in Focus on Rate Hike

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Bank of Canada (BoC) announced Wednesday that it was raising its benchmark interest rate by 25 basis points, the third time since July 2017. The key interest rate was hiked to 1.25% in the recent monetary policy meeting, the highest since 2009.

Following the central bank’s decision, Canada's five biggest banks, Royal Bank of Canada, Toronto Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Montreal and Scotiabank, all increased their prime lending rate to 3.45% from 3.20% previously. This is expected to hugely impact consumers with mortgages.

Economic Scenario

Canada’s GDP growth remained unchanged in October compared with economists’ forecast of a 0.2% monthly increase and a rise of 0.2% in September. On a year-over-year basis, it increased 3.0% in the third quarter compared with 3.6% in the previous quarter. Moreover, consumer prices in Canada increased 2.1% year over year in November compared with 1.4% in the prior month.

Coming to employment, Canada’s unemployment rate declined to 5.7% in December compared with 5.9% in the prior month. This is the lowest level of unemployment that has been witnessed since comparable data became available in January 1976. Strong economic fundamentals drove the bank’s decision.

However, the central bank 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. "Recent data have been strong, inflation is close to target and the economy is operating roughly at capacity," the bank said in the announcement. “However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economy,” it added (read: ETFs to Watch On NAFTA Talks).

Earlier last week, Canadian government officials said that they expect President Donald Trump to soon announce that the United States intends to pull out of NAFTA. Officials from the three nations are due to hold the second-last round of negotiations in Montreal on the trilateral free trade agreement from Jan 23-28.

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 $3.1 billion and charges 49 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.1%, 21.4% and 10.8% allocation, respectively (as of Jan 16, 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%, 7.4% and 5.4% allocation, respectively (as of Jan 16, 2018). It has returned 13.9% in a year. EWC 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 $43.5 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 39.7%, 13.9% and 9.6% allocation, respectively (as of Jan 16, 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 3.9% allocation, respectively (as of Jan 16, 2018). It has returned 14.7% in a year. QCAN has a Zacks ETF Rank #3 with a Medium risk outlook.

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