Canada Rate Hike In The Cards? ETFs In Focus

The Bank of Canada seems to be having enough confidence in the country’s economy to hike interest rates. The Senior Deputy Governor of the central bank stated that rates have been extraordinarily low for a long time and that the goal had been achieved in order to combat dwindling oil prices.

The governor highlighted that in a scenario of continued growth, the existing stimulus measures will be reassessed and modified accordingly. Post the governor’s speech, the Canadian dollar witnessed a sharp gain and bond yields soared as well. She added that over 70% of the industries have been expanding. This has thus reduced the economy’s dependence on a few key industries, thereby increasing reasons to be optimistic about the economy (read: British Columbia Elections Bring These Canada ETFs in Focus).

The Canadian GDP growth was impressive in the first quarter of 2017. It grew 0.9% compared with 0.7% growth in 2016. Moreover, Canada’s job growth was impressive in the month of May, given that it added 54,500 jobs compared with a forecast of 11,000 job additions.

Despite all the confidence and optimism in the deputy governor’s speech, analysts are predicting that a rate hike won’t be seen as early as the next rate setting meeting on July 12, 2017. This is because many uncertainties still exist. Issues restricting the central bank to act on its agenda range from lower wage growth to higher uncertainties in the U.S. economic policy. Its hourly wages expanded a mere 0.7%, slowest since January 1997, when it started reporting the data (read: ETF Winners and Losers on Trump's Canadian Timber Tariff).

In the current scenario, let us discuss the following ETFs that are primarily focused on providing exposure to Canada equities.

iShares MSCI Canada ETF (AX:EWC)

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

The fund manages AUM of $2.94 billion and charges 48 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 40.87%, 22.37% and 10.25% allocation, respectively (as of June 12, 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 8.17%, 7.13% and 5.52% allocation, respectively (as of June 12, 2017). It has returned 2.29% year to date and 11.15% in the last one year (as of June 13, 2017). EWC currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

SPDR MSCI Canada Quality Mix ETF QCAN

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

The fund manages AUM of $35.53 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 38.95%, 12.40% and 9.57% allocation, respectively (as of June 12, 2017. From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Toronto Dominion Bank and Canadian Imperial Bank of Commerce, with 4.29%, 4.14% and 3.85% allocation, respectively (as of June 12, 2017). It has returned 3.89% year to date and 10.90% in the last one year (as of June 13, 2017). QCAN currently has a Zacks Rank #3 with a Medium risk outlook.

First Trust Canada AlphaDEX Fund FCAN

This fund is a relatively less popular and expensive means to gain exposure to Canadian equities.

The fund manages AUM of $5.71 million and charges 80 basis points in fees per year. Financials, Basic Materials and Consumer Discretionary are the top three sectors of the fund, with 32.01%, 14.71% and 11.83% allocation, respectively (as of June 12, 2017. From an individual holdings perspective, the fund has high exposure to Canadian Apartment Properties Real Estate Investment Trust, Magna International Inc and Manulife Financial Corporation, with 4.54%, 4.37% and 4.21% allocation, respectively (as of June 12, 2017). It has lost 1.27% year to date and 0.48% in the last one year (as of June 13, 2017). FCAN currently has a Zacks Rank #3 with a Medium risk outlook.

Bottom Line

Despite the strong performance of the economy, there are certain headwinds too, that are holding back the central bank from implement its policies. Therefore, the timing of the rate hike is uncertain and we believe it is best to remain on the sidelines for now.

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