Introduction to Canadian ETFs
The easy way to invest north of the border
Canada is an often-overlooked market for U.S. investors seeking a bit of international exposure. With its large mining and energy industries, the country is the 11th wealthiest in the world and one of the few net exporters of energy. Its high standard of living and per capita income also make it very politically-stable. Investors seeking exposure to this rare combination may want to consider investing in Canadian ETFs.
Exchange-traded funds ("ETFs") offer the diversity of an index with the simplicity of equity. Investors can invest in Canadian ETFs to gain exposure to the country's entire economy, specific industries, or even certain asset classes. These Canadian ETFs can be traded with a U.S. brokerage account like a normal equity, making them much easier than American Depository Receipts ("ADRs") or trying to buy foreign stock.
Top 10 most popular Canadian ETFs
Canadian ETFs have grown in popularity over the past several decades, given the country's stability and sizable energy and commodities industries, although the occasional weakness in commodity prices has led to sell-offs. From its gold mines to its oil sands to its logging industry, Canada may be best known for these assets, but its domestic services industry employs about three-quarters of its population. And, the country is also one of the largest agricultural exporters in the world.
The most popular Canadian ETF with exposure to the country's entire economy is the MSCI Canada Index Fund (NYSE: EWC), which holds over 100 Canadian stocks with a total net asset value of nearly $2 billion. However, investors can also choose Canadian ETFs that focus on particular sectors or asset classes, as well as more general ETFs that tend to hold many Canadian stocks.
The three ETFs with the most Canadian exposure are:
- Canadian Energy Income ETF (NYSE: ENY)
- MSCI Canada Index Fund (NYSE: EWC)
- IQ Canada Small Cap ETF (NYSE: CNDA)
Five additional ETFs with more than 50% exposure include:
- Market Vectors Junior Gold Miners (NYSE: GDXJ)
- Gold Explorers ETF (NYSE: GLDX)
- Market Vectors TR Gold Miners (NYSE: GDX)
- Silver Miners ETF (NYSE: SIL)
- Uranium ETF (NYSE: URA)
The Benefits and Risks of Canadian ETFs
There are many benefits to investing in Canadian ETFs. The country is energy independent and ranks higher than the U.S. and most of the E.U. on the Heritage Foundation's index of economic freedom. The country's central bank has also proactively implemented a loose monetary policy to help the economy navigate the economic difficulties experienced in 2008/2009 and during the global sell-off in 2015.
But, there are also many risks that investors should consider when investing in Canadian ETFs. The largest risk is the Canadian economy's exposure to energy and commodities, which tend to be very volatile markets, particularly during downturns like the one seen in 2014 and 2015. While the secular trend may be upwards over the long-term, slowing emerging market or global demand can quickly reverse these trends in the short and medium terms.
Alternatives to investing in Canadian ETFs
Investors seeking more direct exposure to Canadian companies may want to consider American Depository Receipts ("ADRs"). These securities trade on U.S. stock exchanges and represent a specific number of shares in a foreign corporation. Unlike a Canadian ETF, these ADRs represent a single company instead of a basket of stocks.
Popular Canadian ADRs and U.S. traded stocks include:
- Bank of Montreal (NYSE: BMO)
- TELUS Corporation (NYSE: TU)
- Sun Life Financial Inc. (NYSE: SLF)
- BCE Inc. (NYSE: BCE)
- TransCanada Corporation (NYSE: TRP)
Alternatively, investors can also purchase foreign shares on the Toronto Stock Exchange ("TSE") or the TSX Venture Exchange ("TSX"). Since Canada has strong ties to the U.S., many popular U.S. brokerages have the ability to make trades on these exchanges without significant extra legwork.
However, there are some legal and tax implications that may apply.