Canadian ETFs to Kick Off Canada Day

NEW YORK (TheStreet) -- In celebration of Canada Day, I thought it appropriate to take a look at our neighbors to the north, paying close attention to the underlying Canadian economic climate and relevant ETFs: iShares MSCI Canada (EWC), IQ Canada Small Cap (CNDA), Claymore/SWM Canadian Energy Income (ENY), and CurrencyShares Canadian Dollar Trust (FXC).

Over the past decade or so, the Canadian economy has performed admirably. The country's economy expanded at an average rate of 3.3 percent from 1997 to 2007, the highest average growth among G-7 countries.

Furthermore, Canada's first quarter 2010 GDP growth was an impressive 6.1 percent and Canada has been among the first of the developed nations to raise interest rates, pushing them up a quarter of a point on June 1. Canadian job-creation statistics were equally impressive. From 1997 to 2007, Canada's average employment growth was 2.1% -- nearly double that of the United States. During this same period, Canada outperformed the G-7 average almost every year on business investment. Canada outperformed the United States on this measure in every year but three over the same period.

Buffered by Canada's phenomenal banking reputation (which survived without government cash infusions during the most severe financial upheaval in 75 years) the northern nation has secured itself a relatively stable reputation within an otherwise burdened global economy.

Apparent security aside, some economists are cautious of what they perceive as a bubble in the Canadian housing market. In regions such as Vancouver, inflation-adjusted prices of an average home have doubled in the past 35 years, with much of the gains coming in the past 10 years. Although it is assuredly good that they have quickly recovered from the financial crisis, this leaves the sector at risk.

But not everyone agrees with these ominous predictions. Recent financial data may suggest that the markets are finally cooling -- the number of homes sold in May fell by 9.5%, while year-over-year price gains moderated to 8.4%, off from the peak gain of 16% in March, as stated by the Canadian Real Estate Association.

So all in all, the existence of this feared housing bubble is still largely contested.

In terms of fund coverage, the cluster of Canadian ETFs is admittedly small, but offers a surprisingly diverse set of investment opportunities:

The iShares MSCI Canada Index Fund ( EWC), for instance, offers coverage of several sectors within the Canadian economy; most notably, the fund maintains a 34.2% weighting in the financial sector, 26.2% in energy, and 19.6% in materials. EWC's top holdings include the Royal Bank of Canada ( RY) (7.1%), Toronto-Dominion Bank ( TD) (5.6%), Suncor Energy ( SU) (4.5%) and the Bank of Nova Scotia ( BNS) (4.4%). The fund has performed admirably, accruing year-to-date total returns just shy of 6%. In terms of composition, the fund is comparable to the Fidelity Canada ( FICDX), but isn't bogged down by FICDX's higher fees.

For those with a taste for all things small-cap, look no further than the Index IQ Small Cap ETF ( CNDA). The materials sector accounts for a notable 50.7% of CNDA's holding, with energy (17.3%) and financials (7.6%) trailing behind. Among CNDA's top holdings are Biovail Corp (BVP, 2.9%), Osisko Mining Corp (TSE:OSK, 2.7%), Pan American Silver Corp ( PAAS) (2.6%) and Industrial Alliance Insurance (TSE:IAG-C, 2.6%). Although the fund came into play very recently (March 23 of this year), the index it tracks has shown a year-to-date return of 11.08%. Unfortunately, with a volume of less than 10,000 shares per day, the fund has low liquidity and investors should avoid anything more than a very small position.

Meanwhile, the Claymore/SWM Canadian Energy Income Index ETF ( ENY) offers comprehensive exposure to the income-producing stocks of the Canadian energy sector. The fund's 100% energy weighting includes top holdings such as Canadian Oil Sands Trust (TSE:COS.UN , 11.2%), Penn West Energy Trust ( PWE) (8.5%), Crescent Point Energy CRP (CSCTF, 6.9%) and Baytex Energy Trust ( BTE) (6.1%) -- the fund currently maintains 24 separate holdings, and trades with an expense cap of 0.65%. The fund has accrued year-to-date returns of 6.02%, and yields about 3.6%.

Finally, one may obtain ETF exposure to Canadian currency through the CurrencyShares Canadian Dollar Trust ( FXC). FXC trades with an expense ratio of .40%, and boasts NAV year-to-date returns of 3.3%. Predictably, the fund is 100% weighted in the Canadian dollar.

To conclude, Canada looks to be an overall promising area of investment. Despite fears of a housing bubble, Canadian markets and funds have demonstrated growth even in light of the volatile global economy. We should recognize this stability on today of all days, as many Canadians celebrate their national holiday.

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Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

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