The Bank of Canada joined the list of global central bank surprises Wednesday, announcing an unexpected interest rate cut of 25 basis points, bringing the country’s benchmark borrowing rate to 0.75%.
Unexpected though the rate cut may have been, U.S. investors do not appear enthused because the reaction by Canada exchange traded funds in early Wednesday trading has been lethargic at best. Predictably, the CurrencyShares Canadian Dollar Trust (NYSEArca: FXC), which tracks the Canadian dollar’s movement against the U.S. dollar, is under some pressure. FXC is off 1.5% on volume that will likely top the three-month daily trailing average and is one of just eight ETFs to have touched new 52-week lows to this point in Wednesday’s session.
FXC’s new lows today actually have the loonie ETF trading at its lowest levels in nearly six years. The reaction by equity-based Canada ETFs has been more muted. For example, the iShares MSCI Canada ETF (NYSEArca: EWC), the largest U.S.-listed Canada ETF, is trading slightly higher today while the First Trust Canada AlphaDEX Fund (NYSEArca: FCAN), a smart beta spin on Canadian stocks, is up nearly 1%.
The Bank of Canada cut rates in response to lower oil prices, which have plagued the loonie and Canadian stocks. With energy sector allocations of 22.6% and 29.6%, respectively, EWC and FCAN are levered to fluctuations in oil prices. [Cheap Oil Crimps Canada ETFs]
While near-term loonie weakness could lift Canadian stocks, neither EWC nor FCAN, or any U.S.-listed Canada ETF for that matter, is a currency hedged product. That means if the U.S. dollar remains persistently strong against its Canadian rival, investors’ returns in Canada ETFs will be eroded by loonie weakness and greenback strength.
Regardless of central bank action, there are other headwinds facing Canada ETFs. For example, some market observers believe sustained oil weakness could trigger dividend cuts in the energy sector. [Dangerous Days for Canadian Energy Dividends]
Additionally, the Canadian banking sector is also implementing structural changes, such as moving resources out of higher-profit areas and pulling back on international expansions. Canadian financials also look expensive on valuation. EWC allocates 37.1% of its weight to the financial services sector while FCAN has a weight of 13.9% to that sector.
iShares MSCI Canada ETF
