Over the past 10 years, Canada has been booming. If you compare the performance of the S&P 500 index and the Canadian market as represented by the Canada iShare (NYSE:EWC), you can see that, in Canada, buy and hold has worked great. Canada is different from other developed markets -- it has been driven by the boom in natural resources that themselves are driven by the rise of China, India and other emerging markets. The only other developed market that has similar characteristics is Australia.
The Canadian market did come down in the credit crisis of 2008 as the world economy nearly stopped in its tracks, but I view this episode as merely at interruption, rather than the end of the boom. As the world economy grows, emerging markets will grow the fastest and so will demand for Canadian commodities.
The EWC has a combined weighting of over 45% in energy and materials (see table below), which compares with less than 15% for the S&P 500 index (10.96% energy, 3.46% materials). Given that those are the best-performing sectors in the S&P 500 over the past decade, it is not surprising that the S&P 500 has a negative return, while the Canadian market is powering forward. The S&P 500 is short on bull market sectors.EWC TOP HOLDINGS | EWC TOP SECTORS | ||
7.1% | Financials | 34.2% | |
5.6% | Energy | 26.2% | |
4.5% | Materials | 19.6% | |
4.4% | Industrials | 5.4% | |
3.9% | Consumer Discretionary | 4.0% | |
3.6% | Information Technology | 3.5% | |
3.1% | Consumer Staples | 2.8% | |
3.0% | Telecom Services | 2.8% | |
2.9% | Utilities | 1.2% | |
2.8% | Health Care | 0.2% |
Why Canadian Banks Are Not a Problem
The S&P 500 ran into trouble because the financial sector nearly self-destructed with its infectious, never-ending greed for short-term profits. What type of a person in their right mind repackages garbage subprime mortgages into a CDO, rates it AAA, and then acts surprised as that CDO evaporates as the fraudulently-made loans -- some of them to people with no jobs -- begin to default? It is simply moronic to do the above and still be employed in finance -- but I am sorry to report that many of those people still are.
Few such illegal activities happened in the Canadian banking system. Even though Canadian banks comprise 34.2% of the EWC, they are conservatively run and better-regulated than U.S. banks. And when it comes to banks, I like them big, boring, conservative and profitable. Has anyone heard of a bailout for a Canadian bank?
This ETF is an Energy and Metals Play
I love Suncor (NYSE: SU) and Canadian Natural Resources (NYSE: CNQ) for their exposure to tar sands, which promises to be a huge growth driver when oil prices stay sustainably over $100/bbl. I just heard James Chanos on TV that he is shorting some oil majors because they don't have reserve replacement -- this is actually true. His point was that the companies were slowly liquidating, while investors were "asleep." But while many big oil majors do have problems, SU and CNQ don't.
Note to Chanos: It's dangerous to be short companies with a lot of cash like ExxonMobil(NYSE: XOM) that sooner or later will deploy it to grow.
While the S&P 500 has only one gold stock in it -- Newmont Mining (NYSE: NEM) -- which is not particularly well-managed, there are two big gold miners listed in Canada: Goldcorp(NYSE: GG) and Barrick Gold (NYSE: ABX). Barrick has always been more conservatively managed, but better run than Newmont, while Goldcorp is the growth major with its huge new mine in Mexico that recently came online. Some of the smartest investors are makinghuge bets on gold, and so should you.
The fund does have one big tech stock in Research in Motion (NASDAQ: RIMM), which has been a spectacular success. In the interest of full disclosure, I am a Blackberry kind of guy; iPhones are simply not for me. Still, tech is only 3.5% of the Canadian market and RIMM is an odd-ball in Canada, but a nice odd-ball it is.
Finally, there is Potash Corp (NYSE: POT), which is the world leader in potash mining as well as other fertilizer components. Fertilizers, and ag equipment for that matter, are in high demand as improving living standards in emerging markets cause more protein consumption, which requires more grain to be produced. Also, emerging market demographics are decidedly positive.
The Canadian stock market is driven by the right sectors, and I expect it will be profitable for buy-and-hold investors again in the next decade.
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