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Will Canada's Snap Election Bolster ETF?

By Carl Delfeld of Chartwell ETF and ETFfolio

Canadian Prime Minister Stephen Harper has called a snap election, sending voters to the polls for an October 14 vote that will largely focus on an uncertain economy. The results may influence the iShares MSCI Canada ETF (EWC) which looks a bit rich relative to declining commodity prices and a slowing economy.

“Between now and October 14, Canadians will choose a government to defend their interests at a time of economic instability around the world,” Mr. Harper said on Sunday after asking the governor-general to dissolve Canada's 39th parliament.

Christopher Mason of the Financial Times reports that in recent weeks Mr Harper had repeatedly argued that his government, which holds a minority of seats in the House of Commons, was unable to function properly.

Falling US demand for goods and unstable commodity prices have stalled Canada’s economy. It grew only 0.1% in the second quarter, after contracting in the first quarter.

Economists predict the slump will continue well into next year, which likely influenced Mr Harper’s decision to call a vote now before a weak economy further overshadows his government’s agenda.

Mr. Harper will also argue that at a time of economic uncertainty, voters should not risk electing a different leader. After years of prosperity and annual budget surpluses that date back to 1997, government spending has increased dramatically.

It's Canada's fifth general election in 11 years and the third in just over four, dating back to June 2004, when a 25-year spell of successive majority governments ended.

With five parties now represented in the House of Commons and the separatist Bloc squatting on 15% of all federal seats, winning a clear parliamentary majority of 155 MPs appears out of reach.

No offense, but I'll take a two party political system like the US any day of the week over unwieldy coalition governments.

Strong Canadian Dollar Helps ETF (EWC)

The Canada iShare exchange-traded fund (EWC) is getting a boost from the surging Canadian dollar or loonie.

From a rate of 62 cents to the U.S. dollar just five years ago, the loonie hit a 30 year high of 96 cents just last week. The strong loonie is hurting exports but helping increase Canada's purchasing power and also keeps a lid on inflation. The loonie last hit parity with the U.S. dollar in the mid 70s and the strong currency encourages shopping over the border to scoop up bargains from food and clothing to big ticket items like cars.

Since country-specific ETFs are not hedged, their performance is amplified as the foreign currency strengthens against the U.S. dollar. The Canadian dollar has been helped by Canada being on the sweet spot of commodities and energy and the resulting budget and trade surpluses. 40% of its stockmarket is tied to these leading sectors including banking and financial services which support these sectors.

Posted by Carl Delfeld of the Chartwell ETF Advisor

New Energy Canadian ETF Digs Tar Sand

The Canadian exchange-traded fund (EWC) already has significant exposure to the energy sector but Claymore Securities launched this week the Claymore/SWM Canadian Energy Income Index ETF (AMEX: ENY). The new ETF tracks an index that is designed to combine the most profitable and liquid Canadian royalty trusts with the most highly-focused and fastest growing oil sands producers.

The Index is comprised of 30 stocks selected from a universe of companies includes over 35 TSX listed Canadian royalty trusts and 25 oil sands resource producers that are classified as oil and gas producers. The ETF is mid-cap oriented with 45% of the companies in its basket falling into this category. Based on a model, the mix between the royalty trusts and the tar sands producer would change making it more growth oriented or value oriented.

The oil sands producers are selected on the basis of their focus on oil sands production, current production rate and projected production during the next 10 years. Oil sand has received quite a bit of attention over the past few years since high oil prices have made it economical, indeed very profitable, to extract oil from the sands and China has been a big investor in this area and it has stirred concerns that it has planted a beachhead of energy supplies just over the border locking in long-term purchase contracts.

The value of the Canadian dollar or loonie will have a significant impact on the performance of this ETF. It has been very strong against the US dollar over the past few years but may be peaking.

Posted by Carl Delfeld of the Chartwell ETF Advisor

Energy Drives Canadian ETF and Currency

The Canadian exchange-traded fund (EWC) has been a solid performer primarily due to its position on the sweetspot of energy and commodities not to mention the strength of its currency known affectionately as the loonie.

Since 2002, the FT reports that the Canadian dollar has risen almost 50 per cent against the US dollar. It has also been strong against other currencies – but the US accounts for more than 80 per cent of Canadian exports and 60 per cent of imports.

The weak US dollar explains much of the move and even year to date the loonie is up 5% against the dollar. But with mining and manufacturing making up 20 per cent of gross domestic product, it has been the commodities boom that has pushed the Canadian dollar to extreme levels of overvaluation. Sure, the trade balance has surged but the current exchange rate of 1.08 to the US dollar pretty much assumes that commodity prices rise for ever. About 55% of the Canadian ETF's exposure is to either enrgy or banking and much of the banking activity is supporting energy and commodity projects.

By Carl Delfeld of the Chartwell ETF Advisor

CurrencyShares Canadian Dollar Trust (FXC)

The Canadian dollar has had a nice ralley over the last four weeks. It may surprise some that Canada is the second-largest country in the world; only Russia is bigger. Thirty-five million people live in the ten Canadian provinces and three territories.

Vanguard Global ETF to Include Canada

Global ETF investors looking for a simple way to invest in international companies often use the iShares MSCI EAFE ETF (EFA) – but it has two flaws.

One is that 50% of its ETF basket contains companies based in Japan and the United Kingdom with the other 50% spread amongst 45 other countries that obviously offer investors better growth opportinities. The second is that it does not include any Canadian companies.Jen Ryan of The Street.com reports that Vanguard plans an ETF later this quarter that will likely allocate 5% of its assets to Canada.

Called the FTSE All-World ex-USA ETF, it will provide exposure to more than 2,000 large-cap and mid-cap stocks from 48 different countries in the developed and emerging markets. It will have an expense ratio of 25 basis points.

ETF investors could of course just add the Canadian ETF (EWC) which has done well (up 2% last Friday!) withs its exposure to energy and commodities, strong currency (the loonie) and fiscal discipline. Still, Carl Delfeld believes that the Canada ETF should be roughly half that of Japan or the UK ETF in your portfolio. Interestingly, Canadian stocks were removed from the S&P 500 a few years ago.