Get Your Canada Fix

 | May 14, 2012 | 7:30 AM EDT  | Comments
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CNDA

Last week I wrote about ETFs suited for playing the "anti-Greece" economies of the world: those that are on stable fiscal footing and generate significant budget surpluses at a time when much of the world is posting big deficits. The oil-rich markets of the Middle East aren't the only ones showing signs of major improvement at a time when much of the developed world is trudging along. While many developed markets are faced with challenging economic situations that include massive deficits and deteriorating unemployment situations figures, there are actually a few bright spots out there. One of those is a market that's close to the U.S. in terms of geographic proximity, but overlooked in many portfolios.

Figures released late last week indicate that the Canadian economy is adding jobs at a pace that exceeds even the most aggressive predictions, setting the stage for the market to continue its outperformance going forward. After coming through the recent financial crisis relatively unscathed, Canada has prospered for the past several years as strong demand for commodities has padded government coffers and a conservative banking sector has avoided the bumps in the road that have caused major issues in other markets.

Jobs growth, or lack thereof, has been the threat to the recovery effort here in the U.S. -- and the employment picture will continue to be a major driver of equity market performance in the months and years ahead. Where the private sector creates sustainable jobs, stocks will soar. The fact that Canada is enjoying impressive success on the job-creation front is certainly an indicator of strong stock market performance in the coming months, and an opportunity to overweight a market that is bucking the trend, thus weighing down stocks in much of the developed world.

Whether they realize it or not, many U.S.-based investors are light on exposure to Canada. Those who have exposure to developed markets outside the U.S. through EAFE-focused funds -- such as the popular iShares MSCI EAFE Index Fund (EFA) and the Vanguard MSCI EAFE ETF (VEA) -- miss out on this market altogether, since Canada isn't included in that region. While an assumption exists that the Canadian and U.S. economies are generally similar, that perception differs quite a bit from reality. Canada is incredibly rich in natural resources, with these ranging from gold to oil. Further, the country is home to some of the strongest, most stable banks in the world -- a characteristic that the events of the last week have highlighted as another major difference vs. the U.S.

The most popular way to play Canada is through iShares MSCI Canada Index (EWC), which has more than $4 billion in assets under management. But I prefer the IQ Canada Small Cap ETF (CNDA) as a more efficient way to overweight our neighbors to the north. While EWC is loaded down with the financial sector, CNDA has a heavier tilt toward the Canadian natural-resources sector. In other words, it is a better way to access the unique attributes of the Canadian economy, as opposed to having you load up on financial stocks.

CNDA has been in a bit of a slump lately: This ETF has lost more than 4% over the last week and is down almost 14% during the last quarter. But there are signs that the Canadian economy is heating up, and that could signal a reversal of fortune.

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