Canada is the 11th wealthiest country globally, with large mining and energy industries supporting its economy. In fact, it is a net exporter of energy. It is politically stable with a high standard of living and per capita income, making it one of the preferred nations to live and invest in.
The higher income in the hand of an increasing population in the past few years has led to increased interest in various investment products, particularly in the financial market. Investors have a range of products to choose from: stocks, mutual funds, hedge funds, etc. But the ones which they have most preferred are Canadian ETFs.
What is an ETF?
An ETF (Exchange-Traded Fund) is an investment fund that allows you to buy a large number of individual stocks or government and corporate bonds in one go. It can be purchased and sold via a registered broker of a recognized stock exchange.
The general perception is that an ETF is like a mutual fund which is another way to purchase various stocks. But there is a difference. Mutual funds are generally managed by agents who actively trade stocks based on trends. In contrast, ETFs work with an algorithm that tracks the entire economy or indexes such as the TSX or the S&P 500, or the U.S. bond market.
Let’s understand Canadian ETFs better. Canadian ETFs are traded on the Canadian stock exchange, and these funds invest either in the U.S. or Canadian economies. Through investing in ETFs, you can gather knowledge on the country’s economy, particular industries, and certain asset classes ranging from gold mines to oil sands and technology. You can invest in various ETFs through a brokerage account.
In the past few decades, ETFs in Canada has become quite popular among the millennial generation as it offers them higher returns with lesser risk exposure. For newbies, ETFs often act as the first step towards investing in the stock market, giving them a crash course on market volatility and dynamics. ETF investing gives investors a chance to own a slice of the country’s economy and as the economy grows, so will their money.
If you are looking to invest in ETF, the 5 popular Canadian ETFs that have gained over 50% in the last year are:
The JPMorgan Beta Builders Canada ETF (BBCA) provides exposure to the Canadian equity market at a reasonable price. Most developed market funds exclude Canada from their investment, so investors use country-specific funds like the BBCA to fill that gap.
BBCA tracks the index of large and mid-cap equities, with negligible exposure in small-cap companies. The ETF is measured against Morningstar Canada Target Market Exposure Index, and has gained over 50% in the past 1 year. The companies that are a part of this ETF are from the U.S. and Canada, with maximum exposure in the Financial, Energy, and Technology sector.
The iShares MSCI Canada ETF (EWC) has exposure to large and mid-sized companies in the Canadian market, but it is the capping constraint that differentiates it from its peers. As per MSCI’s 25/50 Index methodology, the weightage of a company is capped at 22.5%, and the sum of weightage of all companies representing more than 5% will be constrained at 24.5%.
The capping constraint reduces index turnover, tracking error, an aberration from the root index. The majority of the companies part of the ETF are from Canada, with a higher percentage allocated to the Financial, Technology, and Industry sectors. EWC has given close to 54% returns in the past 1 year and close to 8.14% annual returns since its inception in 1996. These numbers make it one of the best ETFs to invest in.
The iShares International Preferred Stock ETF (IPFF) provides exposure to preferred stocks issued by companies in developed markets outside the U.S. IPFF is a valuable tool for investors who want to get into an asset class that is usually underweight or overlooked in the investors’ portfolios. Preferred stocks showcase the features of both stocks and bonds that offer a high pay-out.
The ETF is tracked against the S&P International Preferred Stock Index, earning over 53% returns in the past 1 year. Securities selected under the ETF can be one of any credit rating but shouldn’t have a mandatory conversion in the next 12 months. The IPFF ETF primarily gives you exposure to the energy and financial companies in Canada, with the top 10 companies having over 23% weightage. International preferred stock (IPFF) is an excellent addition for investors who are looking to buy and hold for the long-term and boost the income generated from their investment.
The Franklin FTSE Canada ETF (FLCA) tracks the performance of mid-size and large-cap Canadian companies listed on the index. The ETF is measured against the FTSE Canada RIC Capped Index, generating more than 50% returns in 1 year and over 11% returns in the past 3 years on an annual basis.
To stick to the index benchmark, the ETF avoids concentration in a single company by capping it at 20% of the total weightage. Additionally, the aggregate weight of Canadian businesses in the ETF with a weightage of over 4.5% is capped at 48% of the total weight of the portfolio. The index is reviewed semi-annually to revise the weightage allotted to each stock.
Over 40% of the portfolio is currently allotted to the financial sector, with the Royal Bank of Canada having the highest weightage. As of June 2020, the management fee on FLCA was the lowest.
ZCAN, better known as SPDR Solactive ETF, is a multi-cap ETF fund investing in Canadian companies in the equity asset class. The ETF is tracked against Solactive GBS Canada Large & Mid Cap Index, garnering over 73% returns in the past 1 year.
Over a third of the holdings of the ETF are in the financial sector, with the highest weightage among them allotted to the Royal Bank of Canada. The highest weightage in the portfolio is in eCommerce giant Shopify. The ETF has given negative returns in 2 out of the past 5 years. Thus, one should do thorough research and understand the working of ZCAN before investing.
The Bullish takeaway
ETF funds have been around for a while. However, they have only started garnering attention in the past few years because they are easy to use and understand. The Canadian economy has been growing at a steady rate in the past few years. Investing in Canada through these ETFs is an excellent option for any investor looking to divest their portfolio.