Canada ETFs produce strong performance so far in 2016

Jul 12th, 2016 | By | Category: ETF and Index News

Canada is the best-performing stock market in the world so far this year, according to the MSCI Canada Index, which has risen 15.5% year-to-date, and exchange-traded funds tracking the country’s equities have benefited, producing strong returns in 2016.

Mackenzie Investments launches smart beta equity ETFs with US and Canada-based exposures

Canada equity ETFs have produced strong returns so far this year

The stock market in Toronto has managed to push aside the negative effects of the UK’s decision to leave the European Union and produce double-digit returns between January and July.

The MSCI Canada index’s 15.5% rise YTD in US dollar terms compares to a paltry 1.6% from the MSCI All Countries World index.

Many stock markets across the world have suffered after Brexit, when over half of UK voters chose to secede from the EU: the MSCI United Kingdom Index has lost 3% YTD, the MSCI France Index has fallen further at 3.3% and the MSCI Germany Index has tanked to -7%.

Last year, analysts forecast that Toronto’s Stock Exchange Market (TSX) was starting 10 years of poor growth due to weak commodity prices hitting the Canadian economy. However, a rebound of gold, oil and copper prices have meant a reversal of fortunes. (Gold has risen in the last month from just over $1240 per ounce to $1,369.)

“If you look at those three sectors, financials, energy and materials, they have done extremely well. Looking at materials, there are a lot of gold companies in Canada which have had a phenomenal run this year,” said Raman Aylur Subramanian, head of equity applied research at MSCI for the Americas, as reported by City AM.

Canada’s stock markets and the ETFs tracking them are concentrated in sectors such as energy and materials, which are dependent on commodities, as well as financials.

There are six ETFs in Europe which track Canadian equities, including a euro currency-hedged version from UBS.

The cheapest fund available to European investors is the UBS ETF MSCI Canada SF UCITS ETF (LSEUC24), which costs just 0.28%.

Returns from all six funds are in the black so far in 2016, but returns vary significantly depending on the fund currency.

The best performing ETFs year to date are the iShares MSCI Canada UCITS ETF (LSECSCA) and the UBS MSCI Canada SF UCITS ETF (LSE: UC24), which are both up over 31% YTD in sterling terms.

In euro terms, fund returns are still positive YTD but have delivered around half of that of the sterling-based ETFs. The db X-trackers MSCI Canada TRN Index UCITS ETF (D5BH) is up around 12.3% over the same period. A better performer in euro terms is the Lyxor Canada S&P TSX 60 UCITS ETF (LYPT) which is up over 13% YTD.  These two ETFs are also listed in London, under tickers XCAD and LCAU, respectively, in USD.

Lyxor’s underlying index from S&P, the only fund on the European market which is not tracking MSCI, replicates 240 stocks with over 35% of the index in financials. The Royal Bank of Canada, the Toronto-Dominion Bank and the Bank of Nova Scotia Halifax are the top three holdings.

The MSCI Canada index, the more common choice, replicates the performance of just 93 constituents and has an even higher stake in financials at more than 41% of the exposure.

For investors happy with their Canadian ETFs this year, the 12-month performance has not been so smooth. The euro and USD-based funds are in the red by at least 3.5% and 4%, respectively over the last year, while the sterling-based funds are still up by around 12%.

As to the future of Canada’s stock market and whether the rally will last will depend on parts of the world like China where manufacturing still takes place.

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