I'm visiting some family and friends up in Toronto for a bit and got to thinking about ways U.S. investors could get exposure to Canadian markets. There are US-based funds that target oil and gas, mining (industrial and precious metals), and of course, cannabis, but what about broad-based exposure to our "neighbour" to the north?
Equities north of the 49th Parallel
Canada's population is about one-tenth of that of the United States, and from a market capitalization perspective the ratio is more like 3:50, with Canada sporting a total market cap of just over $2.8 trillion USD - or roughly $300 billion more than Apple AAPL -- as compared to the US with just under $50 trillion.
Readers who are old enough may remember when names such as Lucent and BlackBerry (BB) dominated this market, but those days are long gone and the current market cap leaders here are the Royal Bank of Canada (RY) and Toronto-Dominion Bank (TD) at $135 billion and $115 billion, respectively. Indeed, the top 15 names by market cap are mostly financials, with the Canadian National (CNI) and Canadian Pacific Railway (CP) railroad companies as well as a couple energy names thrown in, too. Those 15 names account for just over a third of the country's equity market cap.
To recap, investing in Canada gets you financial, natural resources and natural resources adjacent exposure for the most part. There are 168 cannabis-focused companies, but they amounted to just over $22 billion in market cap as of the market close on July 22.
There are a handful of US-listed funds that track broad Canadian markets. One that caught my eye was the $6 billion-plus JPMorgan BetaBuilders Canada ETF (BBCA) . This fund was launched in August 2018 and sports a 19-basis-point expense ratio, meaning a shareholder with $1,000 invested over a calendar year would pay $1.90 in fees over that period.
The fund is passive and tracks the Morningstar Canada Target Market Exposure Index. Reading through the index methodology, this index is part of a global family of developed and emerging-market country indexes and states that it "does not incorporate Environmental, Social, or Governance (ESG) criteria." Each country index looks to capture 99% of free float market capitalization and the Canadian one does so with 84 names at the latest count. Interestingly, companies that are incorporated in tax havens but have their shares listed at an onshore primary listing venue are classified as being in the country of the primary listing venue.
While the index states it does not apply any ESG criteria in country or security selection, it does perform country-level screening based on Heritage Foundation Index of Economic Freedom ratings with a country needing to score 50 or higher. Morningstar also relies on some World Bank definitions to select countries deemed to be "high- or middle-income." Finally, eligible countries must have at least $5 billion in market capitalization and have a market capitalization to GDP ratio that is in the top 80% of nations globally.
Looking at the table below, it's interesting that even with the Canadian dollar losing ground to the greenback BBCA has outperformed the SDPR S&P 500 ETF SPY by 436 basis points (4.36 percentage points) year to date through July 22.
I've provided the charts above and below so you can see the divergence over time between BCCA and SPY and the performance of the Canadian dollar. Before anyone goes and accuses me of any chart crimes, I put the CAD/USD (Canadian dollar/US dollar) data on the right axis with a slightly different scale to purposefully exaggerate the currency moves; otherwise, it would look like it wasn't moving around all that much. Don't forget that even small currency moves will have an impact on returns when you need to bring everything back to USD.
Wrapping it up
A fund of financial and natural resources (with some real estate and consumer staples and Ottawa-headquartered Shopify SHOP to boot) might not sound as exciting as a metaverse-defining portfolio. But do you know what the US had that Canada did not? A savings-and-loan crisis, a recession after 2008 and a lot of financial-focused issues over the years that either didn't materialize in Canada or didn't cause nearly as much pain. If the first half of this year is any indication, BCCA might be worth a closer look if you think things are going to get worse before they get better. Also, if you believe that the US dollar is overextended against the Canadian dollar and are expecting CAD to strengthen, that's just a little extra maple syrup on the pancake stack if you ask me.