Canadian large cap ETFs have seen further outflows after a rocky 12 months as falling energy prices and volatile financials have harmed the largest listed companies in the country.
This week Canada’s main stock index fell to a two-week low. Materials and financials fell, while lower oil prices also put pressure on energy companies. WTI crude and Brent crude oil prices have each slipped at least $4 over the last week to around $67 and $76 per barrel respectively.
Canadian ETF options are skewed towards volatile sectors
There are six Canadian ETFs listed in the US. EWC, the largest and oldest Canada-focused ETF listed in the US from iShares, is heavily weighted towards energy and financials. It tracks the MSCI Canada Custom Capped Index, less than 100 stocks, with almost 8% in the Royal Bank of Canada, 7.8% in financial group Toronto Dominion and 5.3% in the Bank of Nova Scotia. In the ETF’s top 10 stocks, there are also three energy companies with a combined weighting of more than 11%. The fund has over $2.9 billion in assets and costs 0.49% per year – significantly more than funds which cost just a couple of basis points and track other western developed markets.
Over the past year, Canadian ETF cumulative outflows have dipped to around $280 million. Year to date, Canadian returns averaged minus 0.6%, while the S&P 500, its southern neighbour, has returned a positive 2.5% and the MSCI World is up around 1.4% over the same period.
But as Canadian performance has finally edged back into the green over a shorter timeframe, reaching 7.1% since late April, ETF flows have started to chase that performance, with $822 million gathered over the past month alone. For example, over the past month, EWC is up 1.8% and has gathered $170 million.
Asides from pressure on financials and energy stocks, Canada’s stock market also underwent a partial shutdown due to a technical issue in late April, forcing main exchange operator TMX to halt trading more than an hour early. It happened on a low trading volume day, but since many large Canadian companies are also listed in New York, investors could be tempted to trade elsewhere.
The Toronto Stock Exchange’s S&P/TSX composite index was also sent into decline due to US markets being closed on Memorial Day.