ETFs

Three Reasons Canadian ETFs Have Appeal

With its array of natural resources, supply of commodities and enviable banking system, Canada remains relatively appealing and poses an opportunity for investors.

The democratically governed nation is one of the world’s largest trading nations and is a net exporter of energy.  In fact, Canada boasts the world’s second largest oil reserves, behind Saudi Arabia, as well as ample supplies of natural gas and nuclear energy.  Due to its abundance of energy-related resources, the maple-leaf nation has built strong relationships with China, South Korea and other energy-hungry nations, setting itself up to witness healthy growth in the near-term future. 

In addition to energy resources, Canada is the world’s largest producer of zinc and uranium and is a global source of many other natural resources such as gold, nickel, aluminum and lead.  Canada is also one the world’s largest suppliers of agricultural products such as wheat, canola, other grains, fertilizers and potash.  This is of relevance because as incomes in developing nations increase and populations continue to grow, demand for food, and other natural resources, will follow.  In fact, most of the world’s food demand growth is expected to come from its least-developed nations.

Lastly, Canada has appeal due to the safety of its financial system.  According to the World Economic Forum, Canada has the safest banking system in the world with the lowest likelihood of default.  Additionally, in the realm of the global financial catastrophe, not a single Canadian bank failed and the nation is known to generally run budget surpluses.  To further add icing to the cake, Canada was the first G-7 nation to raise interest rates to curb the effects of imbalances in the supply and demand for the Canadian Dollar, dampening the chances of inflation and building confidence in its policies.  

In a nutshell, Canada is rich in natural resources and commodities which are expected to see increased demand and here are a few plays to the play the country:

  • iShares MSCI Canada Index Fund (EWC), which has 99 holdings and includes Royal Bank of Canada (RY), Suncor Energy (SU) and Barrick Gold Corporation (ABX) in its top holdings.  EWC is up nearly 13% over the last year.
  • Claymore/SWM Canadian Energy Income Index ETF (ENY), which primarily focuses on the energy sector and boasts Canadian Oil Sands Trust and Penn West Energy Trust as its top holdings.  ENY is up nearly 23.7% over the last year.
  • CurrencyShares Canadian Dollar Trust (FXC), which is a currency play on the Canadian dollar.  FXC is up nearly 4.4% over the last year.

Although an opportunity seems to exist in Canadian equities, it is equally important to consider the inherent risks involved.  To help mitigate these risks, the use of an exit strategy which identifies specific price points at which an upward trend could come to an end is of importance.  Such a strategy can be found at www.SmartStops.net.

Disclosure: Long EWC

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